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CA Final Costing
Amendment &
Revision Aids

COVERS ALL
NEW SUMS AND CONCEPTS
FROM LATEST ICAI MAT

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CONTENTS:
1 Revision Aids and Charts
2 Activity Based Costing and BEP
3 Activity Based Costing and Direct Product Profitability
4 Activity Based Costing and Customer Profitability Analysis
5 JIT Features and Back flush Costing Journal Entries and Practicals
6 Life Cycle Costing Practicals
7 PARETO ANALYSIS - Practicals
8 Budget Variance with Responsibility Accounting Statement
9 Budget with Inventory Control
10 Standard Costing - Selling Cost Variance
11 Standard Costing Profit Reconciliation New Variety
12 Standard Costing - Case Study Question on Critical Success Factor
13 Service Sector Utility Bills
14 Transfer Pricing Calculas Based Pricing
15 Multinational Transfer Pricing
16 Drum Buffer Rope Theory of Constraints
17 Profitability Analysis Growth, Price Recovery and Productivity Effect
18 Case Study Based Theory Questions

REVISION CHECK LIST


Detailed Chapter wise - Snapshot of Amendment Cum Revision
Chapter Marks Revision Contents Theory and Practicals
Name
New (Amendments) Old (Existing)

1 Activity Based 10 Break Even with ABC Traditional Cost System Vs


Costing Activity Based System
Direct Product Profitability Variance Analysis of Activity
Based Based Cost
Customer Profitability Analysis
Based
Case Study Based Applicability of
ABC

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2 Target Costing 5 Value Chain Analysis for Cost Steps in Target Costing
Reduction
Case Study Based Value Analysis Value Engineering and Value
Analysis
Kaizen Costing

3 Pricing Poli- 5 Pareto Analysis - Practical Ques- Return on Investment Pric-


cies (External) tions ing Calculations
Case Study Based Pricing Strate- Cost Sheet Based Questions
gies Selection
Calculas Based Optimum Price
Determination
4 Budget 8 Budget Variance with Responsibil- Budget Ratios
ity Accounting
Budget Variance with Performance Cash Budgets
and Summary Budgeting
Budget with Inventory Control
and Stock levels
Applications of Zero Based Bud-
geting
5 Standard 10 Standard Costing - Selling Cost WIP Effect
Costing Variances
Profit Reconciliation - New Vari- Profit Reconciliation - all
ety with Marginal costing varieties
Case Study Based Question on Mix,Yield, Capacity,Efficiency,
CSF Market Size, Market Share
Variance
Chart of Standard Costing For- Missing Figures Problem
mulas
Planning, Operating and
Traditional Variances
Standard Cost Determina-
tion Based on Learning
Curve
Single Plan and Partial Plan
Accounting Features
6 Balanced 5 Case Study Based Questions on Four Perspectives of Score
Score Card Perspectives and KPI Identifica- Card with examples
and Profitabil- tion
ity Profitability Analysis into Growth,
Price Recovery and Productivity /
Cost Leadership, Product Differ-
entiation and Market Share

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7 Relevant Cost- 8 Chart of Relevant Costing Con- Different Approaches of
ing cepts Evaluation
Concept of Minimum Price

Relevant Cost of Material,


Labour, Overheads and Dep-
receiation
8 Transfer Pric- 10 Calculas Based Optimum Price Cost Centre and Profit Cen-
ing Determination tre Disticnction
International Taxation Based Goal Congruency - Meaning
Questions and Importance
Case Study Based Questions Transfer Price based on Op-
portunity Cost/ Goal Con-
gruency
Strategy Based Questions

Dual Tariff, Shared Profit


Transfer Pricing
9 CVP Analysis 5 Probability Based Break Even Break Even Point and Poten-
Analysis tial Break Even Point
Sensitivity Analysis Combined Break Even Point
for multi products
Multiple Break even Point
for slab fixed costs
Indifference Point for evalua-
tion of alternatives
Shut Down Point for Shut-
down or Continue decision
10 Decision Mak- 10 Chart of Decision Making Make or Buy - Using Rele-
ing vant Costing or Indifference
Point
List of Tips to Read the Questions Key Factor/ Principle Bud-
geting Factor - Different
Situations
Sub Contracting - with In-
cremental Fixed Costs
Export Offers - Using Incre-
mental Approach
Any other - using Relevant
Costing Approach

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11 Total Quality 5 Four Types of Quality Cost
Management
Six Sigma

Six Cs of Quality

Ps of Quality

PDCA Cycle

Incremental Approach
to Evaluate Quality Pro-
grammes
12 TOC or 5 Drum - Buffer - Rope Theory Three Perspective of TOC
Throughput Concept
Accounting
Synchronous Manufactur-
ing - Optimised Prodcution
Technology
MRP and MRP II

Throughput Accounting -
Constraint or Bottleneck
Optimisation
Overall profit Statement un-
der Throughput Accounting
13 Service Sector 5 Utility Services Break Even Point in Services
Airlines

14 Just In Time 5 Backflush Costing Journal Entries Just In time Features


Kanban Authorisation

Backflush Costing System

Practical Problems based on


Incremental Approach
15 Life Cycle Practical Questions based on Theory on Phases in Prod-
Costing Profitability Statement uct Life Cycle
Practical Question Based on
Learning Curve

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16 LP Formu- 8 Comparative Study of LP Meth- Conditions of LP
lation and ods Chart
Graph Formulation

Unbounded Minimisation
and Maximisation Problems
Graphical Method

17 Simplex Situations of Constraints

Steps to Solve

Sensitivity Analysis - Inter-


pretations
18 Assignment 10 Chart of Hungarian Rule Hungarian Rule Steps
Special Cases Implication

Airlines Idle Time Minimisa-


tion
Travelling Salesman Cycle
Optimisation
19 Transporta- Chart of VAM and Optimality Test Initial Solution Methods -
tion NWCR, LCAM,VAM
Steps to solve full problem

Special Cases Implication

Sensitivity Analysis - Inter-


pretations
Solving Transportation Prob-
lem by Hungarian Rule
20 Project Man- 8 Errors in Network
agement
Time Schedule and Float
Analysis
Updating the Network

Crashing of Network

PERT - S.D.,Variance, Ex-


pected Time, Probability of
Completion
Resource Allocation Table

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21 Simulation 8 Cakes - Simulation

Dentist Chamber - Simula-


tion
Bank or Service Counter
Simulation
Assembly Line Simulation

Inventory Control - Book


Store Simulation with Lost
demand
22 Learning Applicability of LCT
Curve
Relationship expressed in
Learning Curve Theory
Direct Prediction

Use of Learning Curve


Equation
Use of Learning Curve Table

Pricing and Standard Cost


Computation using LCT
Determining the values
where learning stops
23 Theory Exclu- List of Theory Questions and Sleeping Capsule Book
sives Case study based Questions

How to Approach A Tricky Question in Costing It can answer a lot of


hidden questions in your mind!

1. While attempting a question on cost management, it is most essential to read the facts of the
question carefully.
2. After reading the facts of the question, concentrate whether the requirement is related
to decision-making or to profit and loss statement.
3. If the requirement is related to decision-making you should follow Relevant Cost Concept.
Decision-making will always show effect on profit ascertained by working out relevant gain and
relevant cost.
4. If the requirement is related to profit and loss statement, you should follow Total Cost
Concept. Profit and loss statement will always show the profit or loss which is ascertained by
working total revenue and total cost.
5. In some questions, sometimes requirement are given by number a, b, c, & so on. Then in such

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requirements you should always pre-assume that each & every requirement are independent
unless & until information are interlinked with each other. Solve these requirements independently
with information given in question.
6. In some questions, it may happen that all the information given in the question are
not required to be used at the same time. Some information may be useful in requirement
number (b) or (c) or so on. The thought on this information shall be given only when you are
going to attempt that requirement.
7. Sometimes many information are given in the question, but these information are not required
to be used in the light of requirement of the question. You should identify these information
as irrelevant/useless/ baseless and keep ourselves away from them. Remember my concept of
CHURAIL?
8. You always have to follow the instruction of management blindly even if sometimes
the instruction is contrary to your conceptual understanding. Under no circumstances you have
rights to disregard the management instruction.
9. It should always be kept in mind that each and every information is to be read carefully. Casual
approach or idea approach or plain reading is very dangerous in most of the cases.
10. If the question is silent on some point whose interpretation is required for solving the question,
we should always follow the most acceptable practice of the industry to which the
firm belongs. So bear it in mind that only solving sums from study materials wouldnt suffice
the preparations. You should read news/online about a few industries for their modus operandi
to frame the clear picture in mind of questions asked in exams.
11. Advice/recommendation to the management should be always specific and
unconditional i.e. dont use depends on this or that but if these appears to be ambiguous in
the information, give the advice/recommendation subject to qualifying remarks.
12. Presentation can vary from student to student. It is not at all a cause of worry but it has to be
ensured that the presentation should be up to acceptable norms (if not the best) with
working notes (only essential working notes).
13. One of the most essential part while attempting a question on costing is to ensure proper
planning. Before you start the paper, the entire paper has to be first read carefully so that the
proper planning to attempt the paper can be formulated. Selection of a right question at the
right time is the vital key for grand success in this paper which can be ensured through proper
planning.
14. Ensure proper time management through effective planning choosing the sequence of
attempting the question in such a manner so that time management may not go out of control.
(For example choosing one lengthy question with some light weight question so that time spent
over in one question should be set off against another question). Since the Costing paper is quite
lengthy, it may not be possible to attempt full 100 marks for some students. A target of 90 marks
attempt is fair and put sincere efforts to achieve the same through proper and effective planning.
If you are able to achieve higher than your own designed benchmark, it will be a bonus for you.

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List of Important Theory Topics For Final Costing -

1 Product Life Cycle


2 Pricing Strategies
Skimming the Cream
Penetration
Going Rate
Sealed Bid
Cost Plus
Loss Leader/Optional Product Strategy
Predatory Pricing
Perishable Product Pricing
Geographical Pricing
Bundled Pricing
Return on Investment Pricing
3 Dual Tariff Internal Pricing
4 Pareto Analysis
5 Bench Marking
6 Business Process Re-engineering
7 Six Sigma
8 6 Cs of Quality
9 4 Ps of Quality
10 Quality Circles
11 Quality Control Costs
12 Demings Cycle PDCA Cycle
13 Lean Manufacturing
14 Back Flush Accounting
15 Kaizen Costing
16 Kanban Authorisation and Pull System
17 Value Chain Analysis
18 Value Analysis and Value Engineering
19 Traditional and Zero Base Budgeting
20 Rolling Budgets
21 BSC Perspectives
22 Throughput
23 MRP
24 Direct Product Profitability
25 Uniform Costing and Inter Firm Comparison
Refer Case Study Based Ques-
tions and Sleeping Capsule Book

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CHARTS

A. Activity Based Costing and BEP


1. A manufacturing company produces Ball Pens that are printed with the logos of various
companies. Each pen is priced at Rs 5. Costs are as follows:

Cost Driver Unit Variable Level of Cost


Cost Driver
Unit Sold 2.5 -
Setups 225 40
Engineering Hours 10 250

Other data:
Total Fixed Costs (Conventional) - Rs 48,000
Total Fixed Costs (ABC) - Rs 36500
Required:
1. Compute Break Even Point in units using Activity Based Analysis
2. Suppose that company could reduce the setup cost by Rs 75 setup and could re-
duce the number of engineering hours needed to 215. How many units must be
sold to break even in this cost?

Solution

1. Break Even Units:


[Fixed Costs + (Setup Cost Setups) + (Engineering Cost Engineering Hours)]/(Sale Price
Variable Cost)]
= [36,500 + (` 225 40) + (` 10 250)] /(`5 `2.5)
= 19,200 units

2. = [36,500 + (`150 40) + (`10 215)]/(`5 `2.5)


= 17,860 units

B. Activity Based Costing and Direct Product Profitability

2. Jigyasa India Ltd. (JIL) has 30 retail stores of uniform sizes Fruity and Sweety Retails across
the country. Mainly three products namely Butter Jelly, Fruits and Nuts and Icy Cool are sold
through these retail stores. JIL maintains stocks for all retail stores in a centralized warehouse.
Goods are released from the warehouse to the retail stores as per requisition raised by
the stores. Goods are transported to the stores through two types of vans i.e. normal and

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refrigerated. These vans are to be hired by the JIL.

Costs per month of JIL are as follows:


Amount in Rs

Warehouse Costs:

Labour and Staff Costs 27,000


Refrigeration Costs 1,52,000
Material Handling Costs 28,000
Total 2,07,000
Head Office Costs:

Salary and Wages to Head Office Staff 50,000


Office Administration Costs 1,27,000
Total 1,77,000
Retail Stores Costs:

Labour Related Costs 33,000


Refrigeration Costs 1,09,000
Other Costs 47,000
Total 1,89,000

Average transportation cost of JIL per trip to any retail stores are as follows:
Normal Van Rs 3,200
Refrigerated Van Rs 4,900

The Chief Financial Manager asked his Finance Managers to calculate profitability based on three
products sold through Fruity and Sweety retail stores rather than traditional method of calculating
profitability.

The following information regarding retail stores are gathered:


Butter Jelly Fruit and Nuts Icy Cool

No. of Cartons per cubic metre 42 28 40


No. of items per cartons (units) 300 144 72
Sales per month (units) 18,000 4,608 1,152
Time in warehouse (in months) 1 1.5 0.5
Time in retail stores (in months) 1 2 1
Selling Price per unit (Rs) 84 42 26

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Butter Jelly Fruit and Nuts Icy Cool

Purchase Price Per unit (Rs) 76 34 22


Butter Jelly and Icy Cool are required to be kept under refrigerated conditions.
Additional Information:
Total Volume of all goods sold per month 40,000 cubic metres
Total Volume of all Refrigerated Goods sold per month 25,000 cubic metres
Carrying Volume of Each van 64 cubic metres
Required:
Calculate the profit per unit using Direct Product Profitability Method

Solution
Direct Product Profitability Statement

Butter Jelly Fruits & Icy Cool


Nuts
Selling Price per unit 84.00 42.00 26.00
Less: Purchase Price per unit 76.00 34.00 22.00
Gross Profit (A) 8.00 8.00 4.00
Direct Product Costs:
Warehouse Costs per m3 [W.N.-1] 7.46 2.07 3.73
Retail Stores Costs per m3 [W.N.-2] 6.36 4.00 6.36
Transportation Costs [W.N.-3] 76.56 50.00 76.56
Total DPP costs per m3 90.38 56.07 86.65
Items per m3 [W.N.-4] 12,600 4,032 2,880
Cost per item (B) 0.007 0.014 0.030
Direct Product Profit (A) - (B) 7.993 7.986 3.97

Working Notes
1. Warehouse Related Costs

General Costs(`) Refrigerated


Goods Costs (`)
Labour & Staff Costs 27,000 ---
Refrigeration Costs --- 1,52,000
Material Handling Costs 28,000 ---
Total 55,000 1,52,000
Volume of Goods Sold 40,000 m3 25,000 m3
Cost per m3 per month 1.38 6.08

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Products Time in Warehouse Cost per m3 per Total Cost\
month (`) (`)
Butter Jelly 1 Month 7.46 (1.38 + 6.08) 7.46

Fruits & Nuts 1.5 Months 1.38 2.07


Icy-cool 0.5 Months 7.46 (1.38 + 6.08) 3.73

2. Retail Stores Related Costs

General Costs (`) Refrigerated Goods Costs (`)


Labour Related Costs 33,000 ---
Refrigeration Costs --- 1,09,000
Other Costs 47,000 ---
Total 80,000 1,09,000
Volume of Goods Sold 40,000 m3 25,000 m3
Cost per m3 per month 2.00 4.36

Products Time in Retail Stores Cost per m3 per month Total Cost
Butter Jelly 1 Month `6.36 (`2.00 + `6.36
`4.36)
Fruits & Nuts 2 Months `2.00 `4.00
Icy-Cool 1 Month `6.36 `6.36

(`2.00 + `4.36)

3. Transportation Costs

Normal Van Refrigerated


Van
Cost per trip `3,200 `4,900
Volume of Van 64 m3 64 m3
Cost per m3 per trip `50.00 `76.56

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4. No. of Items per m3
Products No. of Cartons No. of Items per- No. of Items per m3
(m3) Cartons (units)
Butter Jelly 42 300 12,600
(42 300)
Fruits & Nuts 28 144 4,032
(28 144)
Icy - Cool 40 72 2,880
(40 72)

Activity Based Costing and Customer Profitability Analysis


3. A and B are two customers of XYZ Electronics Ltd, a manufacturer of audio players. Selling Price
per unit is Rs 5,400. Its coat of production per unit is Rs 4,420.
Additional costs are:
Order processing cost Rs 2,000 per order
Delivery Costs Rs 3,500 per delivery

Details of customers A and B for the period are given below:
Customer A Customer B

Audio Players Purchased (nos.) 350 500


No. of orders 5 (each of 70 units) 10 (each of 50 units)
No. of deliveries 5 0

The companys policy is to give a discount of 5% on the selling price on orders for 50 units
or more, and to further give 8% discount on the undiscounted selling price if a customer uses
his own transport of collect the order. Assume that production levels are not altered by these
orders.
Required:
i. Analyse the profitability by comparing profit per unit for each customer
ii. Comment on the discount policy on delivery

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Solution
Customers Profitability Statement

Particulars Customer- A Customer- B


Sales (units) 350 500
(`) (`)
Selling Price per unit 5,400 5,400
Less: Discount (Quantity) 270 270
(`5,400 5%) (`5,400 5%)
Less: Discount (Delivery) --- 432
(` 5,400 8%)
Selling Price (Net of Discounts) per unit 5,130 4,698
Less: Variable Cost per unit 4,420 4,420
Contribution per unit 710 278
Total Contribution 2,48,500 1,39,000
(`710 350 units) (`278 500 units)
Less: Additional Overheads
Delivery Cost 17,500 ---
(5 `3,500)
Order Processing Cost 10,000 20,000
(5 ` 2,000) (10 `2,000)
Profit per customer* 2,21,000 1,19,000
Profit per customer per unit 631.43 238.00

Analysis

Even though A has lower sales volume (30% lesser from B), it is contributing almost double
profit that is being contributed by B as overall discount offered to customer A is quite less.

(ii) Comments on the Discount Policy on Delivery

Discount on delivery offered to customer B is `432 per unit. If transport for delivery is provided
to customer B then the cost would have been `70 per unit (10 deliveries ` 3,500 / 500 units),
which is lesser by `362. It may also be noted that delivery cost in case of customer A is only `50
per unit (`17,500 350 units). Hence, company needs to review discount policy on delivery
but significance of profitability of customer B should also be kept in mind while doing so.

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C. Activity Based Costing and Customer Profitability Analysis
4. Oxford Medical Care (OMCC) is a pharmaceutical firm, operating its entire business through
its four customers OX1, OX2, OX3, and OX4. OX1 and OX2 are small pharmaceutical stores
while OX3 and OX4 are large discount stores with attached pharmacies. OMCC uses discount
pricing strategy and prices its products at variable cost plus 25%.

Item Small Pharmaceuticals Large Pharmaceuti- Activity


cals rate
OX1 OX2 OX3 OX4

No. of orders 4 9 6 3 Rs 750


Order Size Rs 40,000 Rs 20,000 Rs 4,25,000 Rs 4,00,000 -
Average Discount 4.5% 9.5% 17.5% 11.5% -
Regular Deliveries 4 9 6 3 Rs 375
Expedite Deliveries 2 0 2 0 Rs 1,250
General Administra- Rs 20,250 Rs 48,375
tion Cost

Required:
i. Prepare a Customer profitability statement that shows the profit from each customer and
each customer channel.
ii. Recommend some points to improve OMCCs profit.

Solution
Statement Showing Customer Profitability Analysis

Particulars Ox1 Ox2 Channel Ox3 Ox4 Chan-


Small Stores Total Large Stores nel
Total
Revenue 1,60,000 1,80,000 3,40,000 25,50,000 12,00,000
Discount 7,200 17,100 24,300 4,46,250 1,38,000 5,84,250
Net Revenue 1,52,800 1,62,900 3,15,700 21,03,750 10,62,000
Variable Costs 1,28,000 1,44,000 2,72,000 20,40,000 9,60,000
Contribution Mar- 24,800 18,900 43,700 63,750 1,02,000 1,65,750
gin
Order Processing 3,000 6,750 9,750 4,500 2,250 6,750
Regular Deliveries 1,500 3,375 4,875 2,250 1,125 3,375
Expedited Deliver- 2,500 --- 2,500 2,500 --- 2,500
ies
Customer Profit 17,800 8,775 26,575 54,500 98,625 1,53,125
Channel Cost 20,250 48,375
Channel Profit 6,325 1,04,750

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Recommendations
Small Pharmaceuticals

Even though Ox1 has lower sales volume (11% lesser from Ox2), it is contributing around 67% of
small stores profit as its order is for larger quantities and discount offered is very less.
OMCC is only just at breakeven point with small pharmaceuticals. To improve profit OMCC-
should:
i. Coordinate with Ox2 to increase order size and try to negotiate a smaller discount.
ii. Try to work with Ox1 to reduce expedited deliveries.

Large Pharmaceuticals

OMCC makes substantial profit from the large pharmaceuticals. Ox4 alone contributing around
55% of total customers profit and its order is for larger quantities. Therefore, Ox4 is most
favorable customer and may be given little extra attention. For Ox3, OMCC may have no op-
tions but to treat it as less profitable customer as Ox3 accounts more than 60% of sales.

D. JIT Features and Back flush Costing Journal Entries and Practicals
FEATURES OF JIT

(a) Pull System of Production: As against traditional Push system, here a product is not made
until the customer requests it and components are not made until they are required by the next
production stage.

(b) Minimum Inventory Level of Raw Materials, WIP and Finished Goods: The concept of
just-in-time inventory aims at reducing cost of inventory control and control of purchase and
supplies for production without running any risk of bottleneck being created in the production
flow. The inventory level is aimed at lowering to the absolute minimum and the safety stock is
eliminated.
In a full JIT system, virtually no inventory is held, that is no raw material inventory and no fin-
ished goods inventory is held, but there will be a small amount of WIP, say one tenth of a days
production.

(c) Loyalty and Close Contact with Suppliers: To fulfill the above aims and objectives the
de- livery of components and materials as and when they are needed must have to be ensured.
The suppliers of components and materials are to be in close contact with the buyer so that
no much time is lost between placing of order and actual supplies. On the part of the suppliers
there should be guarantee for supply on time.
On-time delivery should not be the only criteria, the quality of components and materials must
be maintained and prices kept within reasonable limits. Long-term contracts with the supplies
are needed to achieve the objectives.

(d) Co-ordination and Synchronisation of Process: Just-in-time inventory, therefore, requires


ensuring co-ordination and synchronisation of all operations from demand being placed to sup-

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pliers, supplies being received from suppliers, issues being made to production.
(e) Multi skilled Work force: JIT requires that the labour force must be versatile so that they
can perform any job to keep production flowing as required. Workers in JIT cell are trained to
operate all the machines within it and perform routine preventive maintenance on them.
In JIT, production is only required when demand requires it and so production labour will be paid
regardless of activity. This is why JIT eliminates direct labour as a cost category and considers
labour cost as an indirect fixed cost or overheads.

(f) Flexible Work Cells: A work cell is a cluster or machine whereby a worker can move easily
to complete the entire production work all by himself. JIT system requires the manufacturing
work cells to be very flexible so that it can be changed as and when required as per customer
needs and specification without involving much time and cost.

(g) Production Line: Production process must be grouped by production line rather than by func-
tion in order to eliminate inventory movements between workstations and to speed flow.

(h) KANBAN Authorisation: A simple, infallible information system is required. Originally, the
Japanese used a system based on cards which were called KANBANS. There would be a small
container of components between each workstations with a Kanban card resting on top. When
the container was taken for use by the following workstation the card would be taken off and
left behind. This would be act as a trigger for the previous workstation to produce another
container of that component. Nowadays, computer systems are likely to be used instead of
cards but the basic simplicity of the system should not change.

(i) Zero Defects Policy: A get it right on first time approach and an aim of zero defects. Defect
cause breakdowns in the value chain, they stop the flow of production, create expensive rework
and lead to late deliveries to customers.

(j) Preventive Maintenance: For regularity in production flow, this system culminates the policy
of preventive maintenance i.e. to take measures to prevent the breakdown or defects before
they actually occur. For e.g. Painting the machines to prevent rust.

(k) Continuous Improvement KAIZEN: Kaizen is the Japanese term for continuous improve-
ment in all aspects of a companys performance at every level. As per JIT policy, an organization
must always be keen to innovate means to improve quality and reduce cost through regular
ef- forts and active participation of workers ideas.

ACCOUNTING FOR PULL SYSTEM BACK FLUSH COSTING


Traditional cost accounting systems track the sequence of raw materials and components moving
through the production systems, and as a consequence are called sequential tracking systems. As
JIT system is different, it requires own cost accounting system. The absence of stock makes choices
about inventory valuation systems unnecessary and the rapid conversion of direct material into cost
of goods sold simplifies the cost accounting system.The approach is known as back flush accounting.
Backflush accounting delays the recording of costs until after the events have taken place, then stan-
dard costs are used to work backwards to flush out the manufacturing costs.
The event that triggers the records kept in backflush accounting is the sale of goods.

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This is the system used by TOYOTA in its UK factory. In true Japanese style it manipulates employ-
ees to behave in a certain way. First, employees must concentrate on achieving sales because cost
of sales is the trigger nothing gets recorded until the sale is made. Second, there is no benefit in
producing goods for inventory. In traditional systems, which have a finished goods inventory, manag-
ers can in- crease profit by producing more goods than are sold in a period because an increase in
finished goods inventory reduced the cost of sales in traditional financial accounts.
The back flush accounting model cannot be applied in all organizations. It can only be applied where
a JIT type system is in operation.
The advantages of it is that it is less time consuming and less expensive than traditional system.
The disadvantages may be that with JIT, defects must be eliminated if the system is to work and
so no accounts for this will exist in backflush accounting whereas they are required in traditional
system. Similarly, JIT system practices no WIP policy as a result of which backflush accounting also
does not report WIP Inventory.This can be countered by claiming, quite rightly, immateriality. If only
one tenth of one days production is held in work in progress then it is immaterial. It can also be
claimed that it is immaterial if the work in progress does not change from one period to the next
as opening and closing inventory will cancel each other out.
Backflush accounting can be criticized because of the lack of information that it provides. Some
ar- gue, quite rightly, that in reality it is impossible to eliminate all inventory as a truck arriving with
raw material creates inventory until it is moved to and used in production. If back flush accounting
is used in a system where a substantial amount of inventory is held, a physical stock take will be
needed, be- cause the system does not record the quantity of inventory, instead, it is derived on
paper by the differ- ence between the standard cost of material in the goods sold and the amount
of materials purchased. This must be checked by a physical stock take from time to time.

5. Give Back flush Costing Journal Entries in respect of the following transaction
i. Raw material purchased Rs 3,20,000
ii. Materials placed into production
iii. Actual Direct Labour Cost Rs 50,00
iv. Actual Overhead Cost Rs 4,50,000
v. Conversion Cost Applied Rs 4,70,000
vi. All units were completed and sold
vii. Variance is recognized

For Raw Material Purchased:


Raw Material in Process A/c Dr
To Accounts Payable 3,20,000
3,20,000
For Material Placed into Production:
No Entry
For Actual Direct Labour Cost:
Combined with Overhead

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For Actual Overhead Cost :
Conversion Cost Control Dr
5,00,000
To Payroll
50,000
To Accounts Payable
4,50,00
For Application of Overheads:
No Entry
For Completion of Units:
Finished Goods Dr 7,90,000
To Raw Material in Process A/c
To Conversion Control Account 3,20,000
4,70,000
For Units Sold:
Cost of Goods Sold Dr
7,90,000
To Finished Goods
7,90,000
For Reconginition of Variance:
Cost of Goods Sold Dr
To Conversion Control Account 30,000
30,000

6. Kumar Enterprises has decided to adopt JIT policy for materials. The following
effects of JIT are identified:

To implement JIT, the company has to modify its production and material receipt facilities at a
capital cost of ` 6,00,000. The new facilities will require a cash operating cost of ` 48,000 p.a.
Raw material stock holding will be reduced from ` 28,00,000 to ` 8,00,000.
The company can earn 15 % on its long term investments.
The company can avoid rental expenditure on storage facilities amounting to ` 30,000 p.a. Prop-
erty taxes and insurance amounting to ` 12,000 will be saved due to JIT programme.
Presently there are 7 workers in the stores department at a salary of ` 3,000 each per month.
After implementing JIT scheme, only 2 workers will be required in this department. Of the bal-
ance 5 workers, 3 will be transferred to other departments, while 2 workers employment will
be terminated.
Due to receipt of smaller lots of raw materials, there will be some disruption of production.
The costs of stock out will be ` 3,40,000 in the first year only. This Stock out costs can be
brought down from the second year onwards.

Determine the financial impact of the JIT policy. Is it advisable for the company to implement the JIT
policy.

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Ammendment Mat With Solution


SOLUTION
COST BENEFIT ANALYSIS OF JIT POLICY:

COSTS `
Interest on capital for modifying production facilities (` 6,00,000 x 15%) 90,000
Operating Costs of new production facilities 48,000
Stock out Costs (first year only)

Total 3,40,000
4,78,000

BENEFITS `
Interest on investments for released funds
( ` 28,00,000 ` 8,00,000 )x 15% 3,00,000
Savings in salary of 2 workers terminated
(` 3,000 x 12 months x 2) 72,000
Savings in Rental Expenditure 30,000
Savings In Property Tax and Insurance 12,000
Net Loss due to JIT policy ( first year) 64,000
Total 4,78,000

2. X Video Company sells package of blank video tapes to its customer. It purchases video tapes
from Y Tape Company @ ` 140 a packet. Y Tape Company pays all freight to X Video Company.
No incom- ing inspection is necessary because Y Tape Company has a superb reputation for
delivery of quality merchandise. Annual demand of X Video Company is 13,000 packages. X
Video Co. requires 15% an- nual return on investment. The purchase order lead time is two
weeks. The purchase order is passed through Internet and it costs ` 2 per order. The relevant
insurance, material handling etc ` 3.10 per package per year. X Video Company has to decide
whether or not to shift to JIT purchasing. Y Tape Company agrees to deliver 100 packages of
video tapes 130 times per year (5 times every two weeks) instead of existing delivery system
of 1,000 packages 13 times a year with additional amount of ` 0.02 per package. X Video Co.
incurs no stock out under its current purchasing policy. It is estimated X Video Co. incurs stock
out cost on 50 video tape packages under a JIT purchasing policy. In the event of a stock out, X
Video Co. has to rush order tape packages which costs ` 4 per package.
Comment whether X Video Company should implement JIT purchasing system.
Z Co. also supplies video tapes. It agrees to supply @ ` 136 per package under JIT delivery
system. If video tape purchased from Z Co., relevant carrying cost would be ` 3 per package
against ` 3.10 in case of purchasing from Y Tape Co. However Z Co. doesnt enjoy so sterling
a reputation for quality. X Video Co. anticipates following negative aspects of purchasing tapes
from Z Co. :
(a) To incur additional inspection cost of 5 paisa per package.
(b) Average stock out of 360 tapes packages per year would occur, largely resulting from

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Ammendment Mat With Solution


late deliv- eries. Z Co. cannot rush order at short notice. X Video Co. anticipates lost
contribution margin per package of ` 8 from stock out.
(c) Customer would likely return 2% of all packages due to poor quality of the tape and to
handle this return an additional cost of ` 25 per package.
Comment whether X Video Co places order to Z Co

Solution
Comparative Statement of cost for purchasing from Y Co Ltd under current policy &
JIT

Particulars Current policy JIT


Purchasing cost (13,000 x 140) = 18,20,000 (13,000 x 140.02) = 18,20,260
Ordering cost (2 x 13 orders) = 26 (2 x 130 orders) = 260
Opportnity (1,000/2 x140x15%) = 10,500 (100/2 x 140.02x15%) =1,050
carrying
cost
Other carrying cost (1,000/2 x 3.10) = 1,550 (100/2 x 3.10) = 155
Stock out cost (4 x 50) = 200

Total relevant cost 18,32,076 18,21,925


Comments: As may be seen from above, the relevant cost under the JIT purchasing policy is lower
than the cost incurred under the existing system. Hence, a JIT purchasing policy should be adopted
by the company.

Statement of cost for purchasing from Z Co Ltd.


Particulars `
Purchasing cost (13,000 x 136) 17,68,000
Ordering cost (2 x 130 orders) 260
Opportunity carrying cost (100/2 x 136 x 15%) 1020
Other carrying cost (100/2 x 3) 150
Stock out cost (8 x 360) 2,880
Inspection cost (13,000 x 0.05) 650
Customer return cost (13,000 x 2% x 25) 6,500
Total Relevant cost 17,79,460

Comments:
The comparative costs are as follows,
Under current policy ` 18,32,076.00
Under purchase under JIT ` 18,21,925.10
Under purchase from Z Co Ltd ` 17,79,460

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Ammendment Mat With Solution


Packages should be bought from Z Co as it is the cheapest.

E. Life Cycle Costing Practicals


1. P & G International Ltd. (PGIL) has developed a new product K which is about to
be launched into the market and anticipates to sell 80,000 of these units at a sales price of `300
over the products life cycle of four years. Data pertaining to product K are as follows:

Costs of Design and Development of `8,25,000


Molds, Dies, and Other Tools
Manufacturing Costs `125 per unit
Selling Costs `12,500 per year + `100 per unit
Administration Costs `50,000 per year
Warranty Expenses 5 Replacement Parts per 25 units at `10
per part ; 1 Visit per 500 units (Cost ` 500
per visit)

Required

i. Compute the product Ks Life Cycle Cost.


ii. Suppose PGIL can increase sales volume by 25% through 10% reduction in selling
price. Should PGIL choose the lower price?

Solution
Statement Showing Ks Life Cycle Cost (80,000 units)

Particulars Amount (`)


Costs of Design and Development of Molds, Dies, and Other Tools 8,25,000
Manufacturing Costs (`125 80,000 units) 1,00,00,000
Selling Costs (`100 80,000 units + `12,500 4) 80,50,000
Administration Costs (`50,000 4) 2,00,000
Warranty
(80,000 units / 25 units 5 parts `10) (80,000 units / 1,60,000
500 units 1 visit `500)
80,000
Total Cost 1,93,15,000

Statement Showing Ks Life Cycle Cost (1,00,000 units)

Particulars Amount (`)


Costs of Design and Development of Molds, Dies, and Other Tools 8,25,000
Manufacturing Costs (`125 1,00,000 units) 1,25,00,000
Selling Costs (`100 1,00,000 units + `12,500 4) 1,00,50,000

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Ammendment Mat With Solution


Particulars Amount (`)
Administration Costs (`50,000 4) 2,00,000
Warranty
(1,00,000 units / 25 units 5 parts `10) (1,00,000
units / 500 units 1 visit `500) 2,00,000
1,00,000
Total Cost 2,38,75,000

Statement Showing Ks Life Time Profit

Particulars Amount (`) Amount (`)


80,000 units 100,000 units
Sales 2,40,00,000 2,70,00,000
(80,000 `300) (1,00,000 `270)
Less: Total Cost 1,93,15,000 2,38,75,000
Profit 46,85,000 31,25,000

Decision
Reducing the price by 10% will decrease profit by 33% (`15,60,000). Therefore, PGIL should not cut
the price.

2. Y-Connections, China based firm, has just developed ultra-thintablet S-5 with few features like
the ability to open two apps at the same time. This tablet cost ` 5,00,000 to develop; it has
undergone extensive research and is ready for production. Currently, the firm is deciding on
plant capacity, which could cost either ` 35,00,000 or ` 52,00,000. The additional outlay
would allow the plant to increase capacity from 500 units to 750 units.The relevant data for the
life cycle of the tablet at different capacity level are as under:

Expected Sales 500 units 750 units


Sale Price `79,600 per unit `69,600 per unit
Variable Selling Costs 10% of Selling Price 10% of Selling Price
Salvage Value - Plant ` 6,25,000 ` 9,00,000
Profit Volume Ratio 40%

Required:
Advise Y Connections, regarding the optimal plant capacity to install. The tablets life cycle is
two years. Ignore time value of money.

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Ammendment Mat With Solution

Solution
Workings
Statement Showing Variable Manufacturing Cost per unit

Particulars of Costs ` / unit


Sales 79,600
Less: Contribution (40%) 31,840
Variable Cost 47,760
Less: Variable Selling Costs (`79,600 0.1) 7,960
Variable Manufacturing Cost 39,800

Statement Showing Expected Profit

(000) ` / unit
Particulars of Costs 500 units 750 units
Sales 39,800 52,200
(`79,600 x 500) (`69,600 x 750)
Less:Variable Mfg. Cost 19,900 29,850
(`39,800 x 500) (`39,800 x 750)
Less:Variable Selling Cost 3,980 5,220
(`39,800 x 0.1) (`52,200 x 0.1)
Add: Salvage Value 625 900
Less: Cost of Plant 3,500 5,200
Net Profit 13,045 12,830
Development cost is sunk and is not relevant.

Advice
Based on the above Expected Profit statement which is purely based on financial
considerations firm may go for high price low volume i.e. 500 units level. However, non- financial
considerations are also given due importance as they account for actions that may not contribute
directly to profits in the short run but may contribute significantly to profits in long run. Here,
it is important to note that life cycle of product is two years and there is no significant difference
between the profits at both levels. In this scenario firm may opt the plant having high capacity not
only to increase its market share but also to establish a long term brand image.

Problem-22
Great Eastern Appliances Ltd. (GEAL) manufactures consumer durable products in a very
highly competitive market. GEAL is considering launching a new product Kitchen Care
into the market and gathered the following data:
Expected Market Price `5,000 per unit

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Ammendment Mat With Solution


Direct Material Cost `1,850 per unit
Direct Labour Cost `80 per hour
Variable Overhead Cost `1,000 per unit
Packing Machine Cost (specially to be purchased for this product) `5,00,000
GEAL expects the selling price for the new product will continue throughout the products
life and a total of 1,000 units can be sold over the entire lifetime of the product.

Required
(i) Calculate the expected total labour hours over the life time of the product Kitchen
Care.
(ii) Profitability of product Kitchen Care that GEAL will earn over the life time of
the product.
(iii) Average target labour cost per unit over the life time of the product if GEAL requires
average profit of ` 800 per unit, to achieve its long term objectives.

NOTE
250 -0.3219 = 0.1691, 249 -0.3219 =0.1693

Solution
(i) Calculation of Total Labour Hours over the Life Time of the Product
Kitchen Care

The average time per unit for 250 units is


b
Yx = ax
Y = 30 250 -0.3219
250
Y = 30 0.1691
250
Y250 = 5.073 hours
Total time for 250 units = 5.073 hours 250 units
= 1,268.25 hours
The average time per unit for 249 units is
0.3219
Y249 = 30 249
Y = 30 0.1693
249

Y249 = 5.079 hours


Total time for 249 units = 5.079 hours 249 units
= 1,264.67 hours
Time for 250th unit = 1,268.25 hours 1,264.67 hours
= 3.58 hours
Total Time for 1,000 units = (750 units 3.58 hours) + 1,268.25 hours

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Ammendment Mat With Solution


= 3,953.25 hours
(ii) Profitability of the Product Kitchen Care

Particulars Amount (`) Amount (`)


Sales (1,000 units) 50,00,000
Less: Direct Material 18,50,000
Direct Labour (3,953.25 hours ` 80) 3,16,260
Variable Overheads (1,000 units `1,000) 10,00,000 31,66,260
Contribution 18,33,740
Less: Packing Machine Cost 5,00,000
Profit 13,33,740

(iii) Average Target Labour Cost per unit

Particulars Amount (`)


Expected Sales Value 50,00,000
Less: Desired Profit (1,000 units ` 800) 8,00,000
Target Cost 42,00,000
Less: Direct Material (1,000 units ` 1,850) 18,50,000
Variable Cost (1,000 units ` 1,000) 10,00,000
Packing Machine Cost 5,00,000
Target Labour Cost 8,50,000
Average Target Labour Cost per unit (` 8,50,000 1,000 units) 850

F. PARETO ANALYSIS - Practicals


ILLUSTRATION ON PARETO ANALYSIS

ABC Ltd manufactures and sells seven products. The following data relates to the
latest period:

Product Contribution (` in 000)


P 96
Q 36
R 720
S 240
T 12
U 60
V 24
Analyse which product requires most control as per Pareto.

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Ammendment Mat With Solution


Solution
The first step is to rearrange the products in descending order of contribution and calculate the
cumu- lative contribution.

Product Contribution Cumulative con- Cumulative %


tribution (`000)
(` 000)
R 720 720 61
S 240 960 81
P 96 1056 89
U 60 1,116 94
Q 36 1,152 97
V 24 1,176 99
T 12 1,188 100
It shows that more than 80 percent of the total contribution is earned by two products: R and S.
The position of these products needs protecting, perhaps through careful attention to branding and
pro- motion. The other products require investigation to see whether their contribution can be
improved through increased prices, reduced costs or increased volumes.

G. Budget Variance with Responsibility Accounting Statement


Illustration 15

Nicefit manufactures ready made garments by a simple process of cutting the clothes in
various shapes and then sewing the corresponding pieces together to form the finished
product.
The sewing Department and the cutting department report to the production manager who
along with Engineering Manager reports to the Director-Manufacturing. The Sales Manager,
Publicity Manager and the Credit Manger report to the Director-Marketing, who along with
Direct-Manufacturing reports to the Managing Director of the company.
The Accounts Department reports the following for the last quarter of 2012:

Budgeted Actual
(`) (`)
Bad debt Losses 5,000 3,000
Cloth used 31,000 36,000
Advertising 4,000 4,000
Audit fees 7,500 7,500
Credit reports 1,200 1,050

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Ammendment Mat With Solution


Sales representative Travelling expenses 9,000 10,200
Sales commission 7,000 7,000
Cutting Labour 6,000 6,600
Thread 500 450
Sewing Labour 17,000 18,400
Credit Deptt. Salaries 8,000 8,000
Cutting utilities 800 700
Sewing utilities 900 950
Director Marketing salaries & Admn. Exp. 20,000 21,400
Production engineering expenses 13,000 12,200
Sales management office expenses 16,000 15,700
Production Manger office expenses 18,000 17,000
Direct Mfg. Salaries & Admn. Expenses 21,000 20,100
Using the above data, prepare Responsibility Accounting reports for the Director- marketing,
the Director-manufacturing and the Production manager.

Solution
Responsibility Accounting Reports
For the Production Manager

Cutting Department Budgeted Actual Variance


(`) (`) (`)
Cloth 31,000 36,000 5,000 (A)
Cutting Labour 6,000 6,600 600 (A)
Cutting Utilities 800 700 100 (F)
Total Cutting Deptt. (A) 37,800 43,300 5,500 (A)
Sewing Department: Budgeted Actual Variance
(`) (`) (`)
Thread 500 450 50 (F)
Sewing Labour 17,000 18,400 1,400 (A)
Sewing Utilities 900 950 50(A)
Total Sewing Dept. (B) 18,400 19,800 1,400 (A)
Total (A + B) 56,200 63,100 6,900 (A)

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Ammendment Mat With Solution


For the Director-Manufacturing

Budgeted Actual Variance


(`) (`) (`)

Production Department * Production Engi- 56,200 63,100 6,900 (A)


neering Expenses Production Manager-Office
13,000 12,200 800 (F)
Expenses Total
(*As per responsibility accounting report for 18,000 17,000 1,000 (F)
the production manager) 87,200 92,300 5,100 (A)

For the Direct-Marketing

Bud- Ac- Vari-


geted tual ance
(`) (`) (`)
Sales Representative: Travelling Expenses Sales Commission To-
tal (A)
Sales Management: Office Expenses Advertising 9,000 10,200 1,200 (A)
Total (B) 7,000 7,000 --
Credit Department: Salaries 16,000 17,200 1,200 (A)
Credit Reports Bad Debt Losses Total (C)
Total (A) + (B) + (C)
16,000 15,700 300 (F)
4,000 4,000
20,000 19,700 300 (F)

8,000 8,000
1,200 1,050 150 (F)
5,000 3,000 2,000 (F)
14,200 12,050 2,150 (F)
50,200 48,950 1,250 (F)

NOTE
F denotes favourable variance while A denotes adverse variance.

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Ammendment Mat With Solution


Budget Variance
Problem-24

Sterling Works Ltd. has at the factory three production Departments, Machine Shop, Fabrication and
Assembly which are the responsibility of the shop Superintendent. The shop superintendent along
with Materials Manager, Planning Superintendent and Maintenance Engineer report to the Works
Manager at the factory. The office administration, sales and publicity come under the sales Manager
who along with the Works Manager report to the Managing Director of the Company. The following
data relating to a months performance are culled out from the books of the company:

Particulars Budget Variance from Budget


(`) (`)
Sales Commission 800 50 A
Raw Material & Components
Machine Shop 900 20 A
Publicity Expenses 1,100 100 A
Printing & Stationery 3,200 200 F
Travelling Expenses 4,000 200 A
Wages Machine Shop 800 10 F
Fabrication 600 20 A
Assembly 720 10 A
Material Assembly 760 40 A
Fabrication 460 10 A
Utilities Machine shop 320 10 A
Assembly 470 60 F
Fabrication 560 30 F
Maintenance 400 20 A
Stores 210 40 F
Planning 180 20 A
Shop Superintendents Office
Salaries & Expenses 1,100 22F
Depreciation Factory 3,880 40A
Works Managers Office
Salaries & Administration 3,810 40 A
General Office Salaries & Administration 4,270 30 A
Managing Directors Salary & Administration 2,800 20 F

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Ammendment Mat With Solution


Required

(i) Treating the Machine shop, Fabrication and Assembly as Cost Centres, prepare Cost Sheets
for each centre with the help of this addition information:
The shop superintendent devotes his time amongst Machine shop, fabrication and
Assembly in the ratio 4 : 3 : 4. Other Factory Overheads are absorbed on the basis of Direct
Labour in each Cost centre.
Office, Administration, Selling and Distribution Overheads are borne equally by the Cost
Centres.
(ii) Treating Machine shop, Fabrication and Assembly as Responsibility Centres prepare a
Responsibility Accounting report for the shop Superintendent.

Solution

(i) Cost Sheet for Machine Shop, Fabrication and Assembly Treating them as Cost
Centres

Particulars Machine Shop Fabrication Assembly


Budget Actual Budget Actual Budget Actual
(`) (`) (`) (`) (`) (`)
Raw Material 900 920 460 470 760 800
and Components
Wages 800 790 600 620 720 730
Utilities 320 330 560 530 470 410
Prime Cost 2,020 2,040 1,620 1,620 1,950 1,940
Shop Superinten- 400 392 300 294 400 392
dents
Office Salary & Ex-
penses (4 : 3 :4)
Other Factory 3,200 3,160 2,400 2,480 2,880 2,920
Overheads (W. N. 1)
Factory Cost 5,620 5,592 4,320 4,394 5,230 5,252
Administration, Sell- 5,390 5,443 5,390 5,443 5,390 5,444
ing

& Distribution
Overheads (W. N. 2)
Total Cost 11,010 11,035 9,710 9,837 10,620 10,696

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Ammendment Mat With Solution


Working Notes

(ii) Responsibility Accounting Reports for The Machine Shop, Fabrication &
Assembly as Reasonability Centres

Budget Actual Variance


(`) (`) (`)
A. Machine shop
Material 900 920 20 A
Labour 800 790 10 F
Utilities 320 330 10 A
Total A 2,020 2,040 20 A

B. Fabrication
Material 460 470 10 A
Labour 600 620 20 A
Utilities 560 530 30 F
Total B 1,620 1,620 -----
C. Assembly
Materials 760 800 40 A
Labour 720 730 10 A
Utilities 470 410 60 F
Total C 1,950 1,940 10 F
Total (A+B+C) 5,590 5,600 10 A

NOTE
As shop superintendents office salaries and expenses included his salary also, it has been
assumed that these are not controlled by him, hence not included.

H. Budget with Inventory Control


Problem-23

Bintan-Indo Manufacturers Ltd. (BIML) is specialist in the manufacturing of Industrial Products.


They manufacture and market two types of products under the name X and Y. Company
produces two products from three basic raw materials A, B, and C. Company follows a 13-
period reporting cycle for budgeting purpose. Each period is four weeks long and has
20 working days. Data relating to the purchase of raw materials are presented below:

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Ammendment Mat With Solution


Raw Purchase Standard Reorder Projected Inven- Lead Time
Purchase tory Status at the in Work-
Material Price
Lot (Kg) Point (Kg) end of 5th period ing
(Per Kg) (Kg) Days
On Hand On Or-
der
A ` 1.00 90,000 72,000 96,000 90,000 10
B ` 2.00 30,000 45,000 54,000 - 25
C ` 1.00 60,000 60,000 84,000 60,000 20
Past experience has shown that adequate inventory levels for X and Y can be maintained if
40 percent of the next periods projected sales are on hand at the end of a reporting period.
Other relevant information is as follows:

Product Raw Material Specifications Projected Projected Sales


Inventory Levels
A B C At the end of cur- 6th 7th 8th
rent (5th ) period Period Period Period

Kg Kg Kg Units Units Units Units


X 1.25 0.50 - 18,000 45,00 52,500 57,000
0
Y 2.00 - 1.50 16,800 42,00 27,000 24,000
0
The sales of X and Y do not vary significantly from month to month. Consequently,
the safety stock incorporated into the reorder point for each of the raw materials in adequate
to compensate for variations in the sales of the finished products.

Raw materials orders are placed the day the quantity on hand falls below the reorder point.
BIMLs suppliers are very trustworthy so that the given lead times are reliable.

The outstanding orders for raw materials A and C are due to arrive on the 10th and 4th
working day of the 6th period, respectively. Payments for all raw material orders are remitted
by the 10th day of the delivery.

Required

Determine the following items for raw materials A, B, and C for inclusion in the 6th period
report to management:
(i) Projected quantities (in Kg) to be issued to production.
(ii) Projected quantities (in Kg) ordered and the date (in terms of working days) the order is to be
placed.
(iii) The projected inventory balance (in Kg) at the end of the period. (iv) The payments for
purchases with due date.

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Ammendment Mat With Solution


Solution

(i) Projected Raw Material Issues (Kg)


A B C

X (48,000 units- Refer Note) 60000 24000 -


Y (36,000 units Refer Note) 72000 - 54000
Projected Raw Material Issues 132000 24000 54000

NOTE
Based on this experience and the projected sales, the BIML has budgeted production
of 48,000 units of X and 36,000 units of Y in the sixth period.
X= 52,500 40% + 45,000 18,000 = 48,000
Y = 27,000 40% + 42,000 16,800 = 36,000
Production is assumed to be uniform for both products within each four-week period.

(ii) / (iii)
Projected Inventory Activity and Ending Balance (Kg)

Particulars A B C
Average Daily Usage 6,600 1,200 2,700
Beginning Inventory 96,000 54,000 84,000
Orders Received:

Ordered in 5th Period 90,000 - 60,000


Ordered in 6th Period 90,000 - -
Sub Total 276,000 54,000 144,000
Issues 132,000 24,000 54,000
Projected Ending Inventory Balance 144,000 30,000 90,000

NOTE
Ordered 90,000 Kg of A on fourth working day.
Order for 90,000 Kg of A ordered during fifth period received on tenth working day.
Order for 90,000 Kg of A ordered on fourth working day of sixth period received on four-
teenth working day.
Ordered 30,000 Kg of B on eighth working day.
Order for 60,000 Kg of C ordered during fifth period received on fourth working day.
No orders for C would be placed during the sixth period.

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Ammendment Mat With Solution


(iv) Projected Payments for Raw Material Purchases

Raw Day/Period Day/Period Quantity Amount Day/Pe-


Material Ordered Received Ordered Due riod Due
A 20th/5th 10th /6th 90,000 Kg ` 90,000 20th/6th
C 4th/5th 4th /6th 60,000 Kg ` 60,000 14th/6th
A 4th/6th 14th /6th 90,000 Kg ` 90,000 4th/7th
B 8th/6th 13th /7th 30,000 Kg ` 60,000 3rd /8th

1. Standard Costing - Selling Cost Variance


Ravi, Richard, Rahim and Roop Singh are regional salesmen distributing the product of Super
Perfumes Ltd.The selling price of the product is ` 400 per unit.The sales quota and the standard
selling expenses for the year are:
Salesmen Sales Quota (`) Standard Selling
Expenses (`)
Ravi 7,50,000 2,25,000
Richard 9,00,000 2,47,500
Rahim 11,50,000 2,87,500
Roop Singh 6,00,000 2,25,000
Actual data for the year were as follows: -

Ravi Richard Rahim Roop Singh

Days on field work 200 175 225 250


Kilometres covered 20,000 18,000 18,000 30,000
` ` ` `
8,00,000 10,00,000 10,50,000 5,20,000
Sales
80,000 80,000 80,000 80,000
Salary
9,000 7,500 5,375 8,000
Free samples
8,000 9,000 10,000 6,000
Postage and stationery
9,000 5,000 4,000 10,000
Other expenses
The salesmen are allowed conveyance allowance of ` 1.50 per kilometre and a daily allowance
of ` 80 per day for the days spent on field work. Ravi gets a commission of 6 percent on sales and
others are given a commission of 5 percent on sales. Corporate sales office expenses are chargeable
at the rate of ` 30 per unit sold in the case of Ravi and Richard and ` 40 per unit in the case of
Rahim and Roop Singh. Prepare a schedule showing the selling cost variances by salesmen.

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Ammendment Mat With Solution


Solution
Working Note:

Ravi Richard Rahim Roop


Singh
(i) Standard Sales Units 1,875 2,250 2,875 1,500
(Sales Quota ` 400)
(ii) Standard Selling Expenses per 120 110 100 150
Unit (` )
(Std. Selling Expenses/Std.
Sales Units)
(iii) Actual Sales Units 2,000 2,500 2,625 1,300
(Actual Sales ` 400)
(iv) Actual Selling Costs ` ` ` `
Daily Allowance Conveyance Allow- 16,000 14,000 18,000 20,000
ances
30,000 27,000 27,000 45,000
Salaries
80,000 80,000 80,000 80,000
Free Samples
9,000 7,500 5,375 8,000

Postage & Stationery 8,000 9,000 10,000 6,000


Other Expenses 9,000 5,000 4,000 10,000
Commission on Sales 48,000 50,000 52,500 26,000
Corporate Sales Of- 60,000 75,000 1,05,000 52,000
fice Expenses
2,60,000 2,67,500 3,01,875 2,47,000
Total Actual Selling
Cost
(v) Standard Selling Cost 2,40,000 2,75,000 2,62,500 1,95,000
(Actual Units Sold
Std. Selling Expenses
per Unit)

Calculation of Variances:

Since all the selling expenses have been related to sales units, only one variance can be calculated by
comparing the standard and actual selling costs as is shown in the schedule below:

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Ammendment Mat With Solution


Schedule showing the selling cost variances by salesman

Ravi Richard Rahim Roop Total


(`) (`) (`) Singh (`) (`)
Standard Selling Expens- 2,40,000 2,75,000 2,62,500 1,95,000 9,72,500
es (Refer to Working
Note (v))
Actual Selling Expenses 2,60,000 2,67,500 3,01,875 2,47,000 10,76,375
(Refer to Working Note
(iv))
Selling Cost Variance 20,000 (A) 7,500 (F) 39,375(A) 52,000(A) 1,03,875(A)

Illustration 22

X Manufacturing company takes over sales from the Selling Agents. In the first month of operation
of direct sales, the following costs have been incurred. Prepare the actual percentage of selling
cost on total sales, compare with the standard selling cost.

Compute the variances and offer your comments about the standards, which are based on actual for
the previous year, and performance of the Zonal offices.

Zonal offices Sales Budgets Standard Selling


(units) Expenses
Eastern India (E.I.) Western India (W.I.) Northern India 20,000 ` 16,000
(N.I.) Southern India (S.I.) Central India (C.I.) 12,000 12,000
Northern Western India (N.W.I.) 6,000 8,000
15,000 12,000
10,000 10,000
5,000 8,000
Selling (price per unit) ` 25

Actual: E.I. W.I. N.I. S.I. C.I. N.W.I


Units Sold (000 units) 19 10 5.9 17.5 9.5 5
Salesmens Salaries (` 000) 8 7 5 7 6 5
Sales Travelling (` 000) 4 5 3.6 2.7 2.7 1.8
Halting Charges & Bhatta (` )
Salesmens Commission on 850 800 500 500 700 500
Selling Prices @

1% 1.25% 1% 0.9% 1% 1%

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Ammendment Mat With Solution


Solution
Comparative Cost Statement of Selling Expenses

E.I. W.I. N.I. S.I. C.I. N.W.I.


Standard Data
1. Selling Exp. (` ) 16,000 12,000 8,000 12,000 10,000 8,000

2. Budgeted Sales 20,000 12,000 6,000 15,000 10,000 5,000


(units)
3. 0.80 1.00 1.33 0.80 1.00 1.60
Selling Cost (per
unit) (`)
4. Actual Sales (units) 19,000 10,000 5,900 17,500 9,500 5,000
Standard Selling Cost
5.
for Actual Sales (`)
[(3)(4)]

15,200 10,000 7,847 14,000 9,500 8,000

Actual Selling Actual Data


Salesmens Salaries (` ) 8,000 7,000 5,000 7,000 6,000 5,000

Sales Travelling (`)


4,000 5,000 3,600 2,700 2,700 1,800
Halting Charges etc.
850 800 500 500 700 500
(`)
Salesmens Commis- 4,750 3,125 1,475 3,937 2,375 1,250
sion (`)
Total Actual Sell- 17,600 15,925 10,575 14,137 11,775 8,550
ing
Costs (`)
6.
Analysis
7. Selling Costs - 2,400 - 5,925 - 2,728 - 137 - 2,275 - 550
Variance
(`)[(5) (6)]
8.
Budgeted
Sales
[Budgeted 3,00,000 1,50,000 3,75,000 2,50,000 1,25,000
5,00,000
Qty. Bud-
geted Price]
(`)

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9. Budgeted
Selling Ex-
penses as a %
of Budgeted
Sales [(1)/
(8)100]
3.20% 4.00% 5.33% 3.20% 4.00% 6.40%
10. Actual Sales
(`) 4,75,000 2,50,000 1,47,500 4,37,500 2,37,000 1,25,000
11.
Actual Selling
Expenses as
a % of Actual
Sales 3.71% 6.37% 7.17% 3.23% 4.97% 6.84%

Comments : The above table shows that except for southern India and North western India
Zonal offices, actual sales expenses widely differ from budgeted selling expenses. However, the fol-
lowing points have to be noted:

(i) The standards are based on the actual expenses for the last year. Truly speaking they are not
standards and, therefore, they cannot provide realistic guidance for exercising control over
the selling expenses. Variances may be there because current years conditions might have
completely changed or circumstances which were applicable last year may have ceased to
become applicable now.

(ii) The causes of the variances cannot be correctly spelt out in the absence of details about the
Standard selling expenses. The details of actual selling expenses have been given but the
details of standard selling expenses have not been given. Salesmens salaries is a fixed charge,
variance may be there on account of increase in their salaries. Sales travelling expenses are of
a semi-variable nature. Less volume of sales might have resulted in less recovery of fixed sales
travelling expenses such as railway freight, hotel charges.

J. Standard Costing Profit Reconciliation New Variety

Problem-39

A company following standard marginal costing system has the following interim trading statement
for the quarter ending 30th June, 2013, which reveals a loss of ` 17,000, detailed below:

`
Sales 4,99,200
Closing Stock (at prime cost) 18,000
Direct Material 1,68,000
Direct Labour 1,05,000

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Variable Overhead 42,000
Fixed Overhead 1,20,000
Fixed Administration Overhead 40,000
Variable Distribution Overhead 19,200
Fixed Selling Overhead 40,000
Loss 17,000
Additional information is as follows:
(i) Sales for the quarter were 1,200 units. Production was 1,400 units, of which 100 units were
scrapped after complete manufacture. The factory capacity is estimated at 2,000 units.
(ii) Because of low production, labour efficiency during the quarter is estimated to be 20% below
normal level.

Required
Analyse the above and report to the management giving the reasons for the loss.

Solution
Working Note

Details Working Amount (`)


Selling Price `4,99,200 416
1,200units
Raw Materials `1,68,000 120
1,400units
Labour `1,05,000 60
1,750units *

*Equivalent units
(1,400 units / 80%)
Variable Overheads `42,000 30
1,400units
Manufacturing Cost (Variable) 210
Distribution Overheads `19,200 16
1,200units
Total Variable Cost 226
Contribution 190
Fixed Cost Factory Administration ` 1,20,000
Selling ` 40,000
` 40,000
2,00,000

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Ammendment Mat With Solution


STANDARD PROFIT for 1,200 Units Sold

Details Working Amount (`)


Contribution 1,200 units x ` 190 2,28,000
Less: Fixed Costs 2,00,000
Profit 28,000
Reconciliation Between Budgeted and Actual Profit

Details Working Amount (`)


Budgeted Profit (2,000 units x ` 190 ` 1,80,000
2,00,000)
Less:Volume variance (800 units x `190) 1,52,000
Standard Profit 28,000
Factors causing loss:
Units Scrapped (100 units x `210) 21,000
Labour Inefficiency (350 units x `60) 21,000
Undervaluation of Closing Stock {100 units x (`210 `180)} 3,000
Actual Profit (-)17,000

K. Standard Costing - Case Study Question on Critical Success Factor


Problem-1

Natural Spices manufactures and distributes high-quality spices to gourmet food shops and top
quality restaurants. Gourmet and high-end restaurants pride themselves on using the freshest,
highest-quality ingredients.
Natural Spices has set up five state of the art plants for meeting the ever growing demand. The firm
procures raw material directly from the centers of produce to maintain uniform taste and quality.
The raw material is first cleaned, dried and tested with the help of special machines. It is
then carefully grounded into the finished product passing through various stages and packaged
at the firms ultraclean factory before being dispatched to customers.
The following variances pertain to last week of operations, arose as a consequence of managements
decision to lower prices to increase volume.

Sales Volume Variance 18,000 (F)


Sales Price Variance 14,000 (A)
Purchase Price Variance 10,000 (F)
Labour Efficiency Variance 11,200 (F)
Fixed Cost Expenditure Variance 4,400 (F)

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Required

(i) Identify the Critical Success Factors for Natural Spices.


(ii) Evaluate the managements decision with the Overall Corporate Strategy and Critical Success
Factors.

Solution

(i) Gourmet and high-end restaurants recognises Natural Spices on the basis of its high quality
of spices. Therefore, quality is most critical success factor of Natural Spices. There are other
factors which cannot be ignore such as price, delivery options, attractive packing etc. But
all are secondary to the quality.
(ii) Deliberate action of cutting price to increase sales volume indicates that firm is intending
to expand its market to retail market and street shops which is price sensitive.

L. Service Sector Utility Bills

Problem-1

A public company responsible for the supply of domestic gas has been approached by several
prospective customers in a rural area adjacent to a high-pressure main. As a condition of its
license to operate as a utility, the company is obliged to respond positively to current needs
provided the financial viability of the company is not put at risk. New customers are charged
` 250 each for connection to the system.

Once a meter is installed, a standing charge of ` 10 per quarter is billed. Charges for gas are
levied at ` 400 per 1,000 metered units.

A postal survey of the area containing, according to the rating authority, 5,000 domestic units,
elicited a 40% response rate. 95% of those who responded confirmed that they wished
to become gas users and expressed their willingness to pay the connection charge.
Although it is recognized that a small percentage of those willing to pay for connection may
not actually choose to use gas, it is expected that the average household will burn 50 metered
units per month. There will be some seasonal differences.
The companys marginal cost of capital is 17% pa and supplies of bulk gas cost the company
` 0.065 per metered unit.

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Ammendment Mat With Solution


Required

Determine what the maximum capital project cost can be to allow the company to provide the
service required if wastage of 15% has to be allowed.

Solution
Working Notes

1. No. of Customer = 1,900


(5,000 40% 95%)
2. Consumption of Gas = 11,40,000 Metered units
(1,900 50 mt. 12 months)
Gas Supply = 13,41,176 Metered units
{11,40,000 (100 85)}

Cash Inflow
(`)
Rent (1,900 4 Quarters `10) 76,000
Add: Consumption Charge (11,40,000 `0.4) 4,56,000
Less: Cost of Company (13,41,176 `0.065) 87,176
Cash Inflow p.a. 4,44,824
One Time Connection Charge = `4,75,000 (`250 1,900 customers)

Maximum Capital Project Cost


(Can be to allow the company to provide the service required) By Following the Concept of
Perpetuity
(Investment `4,75,000) 17% = `4,44,824
Investment = `30,91,612

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Ammendment Mat With Solution


M. Transfer Pricing Calculas Based Pricing

Problem-13
Eastern Company Ltd. has two Divisions namely Casnub Bogie Division (CBD) and Wagon Di-
vision (WD). CBD manufactures Casnub Bogies and WD manufactures BOBN type of Wagons.
To manufacture a Wagon WD needs four Casnub Bogies. CBD is the only manufacturer of the
Casnub Bogies and supplies both WD and outside customers. Details of CBD and WD for
the coming financial year 2014-15 are as follows:

CBD WD
Fixed Costs (`) 9,20,20,000 16,45,36,000
Variable Cost per unit (`) 2,20,000 4,80,000*
Capacity per month (units) 320 12

* excluding transfer costs

Market research has indicated that the demands in the market for Eastern Company Ltd.s
products at different quotations are as follows-
For Casnub Bogies: Quotation price of `3,20,000 no tender will be awarded, but demand will
increase by 30 Casnub Bogies with every `10,000 reduction in the unit quotation price below
`3,20,000.

For Wagons: Quotation price of `17,10,000 no tender will be awarded, but the demand for
Wagons will be increased by two Wagons with every `50,000 reduction in the unit quotation
price below `17,10,000.

Required

(i) Calculate the unit quotation price of the Wagon that will maximise Eastern Company
Ltd.s profit for the financial year 2014-15.
(ii) Calculate the unit quotation price of the Wagon that is likely to emerge if the divisional
managers of CBD and WD both set quotation prices calculated to maximise divisional
profit from sales to outside customers and the transfer price is set at market selling
(quotation) price.
NOTE
If P = a bQ then MR = a 2bQ

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Ammendment Mat With Solution


Solution

(i) Assumed Quotation Price P, Quantity Q


The Marginal Cost of a Wagon is `13,60,000 (`2,20,000 4 Casnub Bogies + `4,80,000)
Demand Function for a Wagon
P = `17,10,000 (`50,000 / 2) Q
Revenue (R) = Q [17,10,000 25,000 Q]
= 17,10,000 Q 25,000 Q2

Marginal Revenue (MR) = 17,10,000 50,000 Q


Marginal Cost (MC) = 13,60,000
Profit is Maximum where Marginal Revenue (MR) equals to Marginal Cost (MC)

17,10,000 50,000 Q = 13,60,000


Q = 7.00 units

By putting the value of Q in Demand Function, value of P is obtained. P = 17,10,000
(50,000/ 2) Q = 17,10,000 25,000 7.00
= `15,35,000
At `15,35,000 unit Quotation Price of a Wagon the Eastern Company Ltd.s Profit will
be Maximum.

(ii) At CBD the Divisional Manager would ensure that Divisional Marginal Revenue should
be equal to Divisions Marginal Cost so that Profit can be Maximum.
MR of a Casnub Bogies = MC of Manufacturing a Casnub Bogies
3,20,000 2(10,000/ 30) Q = 2,20,000
Q = 150 units
Selling Price of a Casnub Bogie P is
P = 3,20,000 (10,000/ 30) 150
= `2,70,000

CBD will earn Maximum Profit when it will Quote `2,70,000 to the Outside Market.
Since, Outside Market Quotation is Transfer Price as well, so Transfer Price to WD will be
`2,70,000 and it forms part of WDs Marginal Cost.
At WD, Division Manager would ensure that Divisional Marginal Revenue should be equal
to Divisions Marginal Cost so that Profit can be Maximum.

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Ammendment Mat With Solution


MR of a Wagon = MC of Manufacturing a Wagon
17,10,000 50,000 Q = (`2,70,000 4 Casnub Bogies) + `4,80,000

Q = 3.00 units
Quotation Price of a Wagon P should be:
P = `17,10,000 25,000 3.00
= `16,35,000
The unit Quotation Price of Wagon that emerges as a result of Market Based Transfer
Pricing is `16,35,000.

N. Multinational Transfer Pricing


Problem-14

Celestial Electronics and Consumer Durables Corporation (CECDC), is a Taiwan (a state,


Republic of China) based consumer electronics manufacturer. To expand its market share
in South Asia it has formed CECDC India Pvt. Ltd. (CIPL) in India. For the purpose of
performance evaluation, the Indian part is treated as responsibility centre. CIPL imports com-
ponents from the CECDC and assembles these components into a LED TV to make it
saleable in the Indian market. To manufacture an LED TV two units of component LX are
required. The following cost is incurred by the CECDC to manufacture a unit of component
LX:

Amount (TWD)
Direct Material* 440.00
Direct Labour (3 hours) 120.00
Variable Overheads 40.00
(*) purchased from domestic market.

CECDC incurs TWD 30 per unit as Wharfage Charges.


CECDC has a normal manufacturing capacity of 5,00,000 units of component LX per an-
num, 70% of its production is exported to CIPL and rest are sold to other South-east Asian
countries at TWD 750 per component. The tax authorities both in Taiwan and India, consider
TWD 750 (= `1,500) per component LX as arms length price for all transfers to CIPL. CIPL
incurs `10 per unit as shipment charges.

The cost data relevant to the LED TVs are as follows:


Amount (`)
Variable Costs per unit:
Direct Material (excluding component LX) 6,200
Direct Labour 115
Fixed Cost:

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Ammendment Mat With Solution


Office and Administrative Overheads
Selling & Distribution Overheads
CIPL can sell 1,75,000 units of LED TV at `11,000 per unit.
There is a dispute on the transfer pricing of component LX between the CECDC and
CIPL. CECDC is in favour of charging TWD 750 per component to CIPL as it is the arms
length price and it has to pay tax on this. On the other hand CIPL in its argument saying
that the substitute of component LX can be purchased from the Indian market at `1,490
only and moreover it has to pay import duty on import of component Lx so the transfer
price suggested by CECDC is not acceptable.

The following are the direct / indirect tax structure in India and Taiwan:

Type of Tax / Duty India Taiwan


Corporate Tax Rate 30% 25%
Import (Custom) Duty 10% 15%
Export Duty Nil Nil

Required
From the above information, Calculate:

(i) Minimum Price at which CECDC can transfer component LX to CIPL.


(ii) Maximum Price that can be paid by CIPL to CECDC for each component LX.
(iii) Profitability Statement for the group in TWD.

NOTE
i. For Duty and Tax calculation, consider arms length price only.
ii. Ignore the DTAA and other tax provisions.
iii. Conversion Rate 1 INR = 0.50 TWD

Solution
(i) The minimum price at which CECDC can transfer component LX to CIPL is Variable
Cost per unit plus Corporate Tax attributable to per unit of component LX

Minimum Transfer Price per unit of component LX


Amount (TWD)
Direct Material 440.00
Direct Labour 120.00
Variable Overheads 40.00
Wharfage Charge 30.00
Corporate Tax attributable to per unit of component LX (W.N.1) 30.00

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Amount (TWD)
Direct Material 440.00
Total 660.00
Minimum Transfer Price per unit of component LX is 660 TWD or `1,320
(ii) Maximum Transfer Price that CIPL can pay to CECDC for every unit of component LX
is the market price of component LX in domestic market minus cost of import
(if any).

Maximum Transfer Price per unit of component LX

Amount (`)
Market Price of component LX (Indian Market) 1,490.00
Less: Import Duty (750 TWD 2 10%) 150.00
Less: Shipment Cost 10.00
Total 1,330.00
Maximum Transfer Price that CIPL can pay to CECDC for every unit of component LX is
`1,330 or 665 TWD.
(iii) Profitability Statement for the Group (TWD 000)

Particulars LED TV Component Lx Total


Sales Revenue 9,62,500 1,12,500 10,75,000
(1,75,000 units `11,000 (1,50,000
0.50) units750TWD)
Total Revenue (A) 10,75,000
Variable Manufacturing 2,10,000 90,000 3,00,000
Cost (3,50,000 units 600 TWD) (1,50,000 units
(Component LX) 600TWD)
Wharfage 10,500 4,500 15,000
Charges (3,50,000 units 30 TWD) (1,50,000 units
30TWD)
Other Variable Manufac- 5,52,562.50 --- 5,52,562.50
turing Cost (excluding LX) (1,75,000 units `6,315
0.50)
Import Duty 26,250 --- 26,250
(10% 3,50,000 units
750TWD)
Shipment Cost 1,750 --- 1,750
(3,50,000 units `10
0.50)
Office and Admin. Over- 5,900 --- 5,900
heads (`1,18,00,000 0.50)

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Selling & Dist. Overheads 12,900 --- 12,900
(`2,58,00,000 0.50)
Corp. Taxes 30,191.25 15,000 45,191.25
(W.N. 2 & 3) (`60,382.50 0.50)
Total Cost (B) 9,59,553.75
Profit (A) (B) 1,15,446.25

Working Notes
W.N.-1
Corporate Tax Attributable to per unit of Component LX (TWD)

Amount
Profit per unit (750 TWD 440 TWD 120 TWD 40 TWD 30 TWD) 120
Corporate tax per unit (25% on 120 TWD) 30

W.N.-2
Calculation of Corporate Tax paid by CIPL (` 000)

Amount
Sales Revenue (1,75,000 units `11,000) 19,25,000
Less: Variable Costs:
Component LX (3,50,000 units 750 TWD `2) 5,25,000
Other Variable Costs (1,75,000 units ` 6,315) 11,05,125
Less: Import Duty 10% of (3,50,000 units 750 TWD `2) 52,500
Less: Shipment Cost (3,50,000 units `10) 3,500
Less: Fixed Overheads
Office and Administrative Overheads 11,800
Selling and Distribution Overheads 25,800
Taxable Profit 2,01,275
Tax Payable @30% 60,382.50

W.N.-3
Calculation of Corporate Tax paid by CECDC (TWD)

Amount
Profit per unit (750 TWD 440 TWD 120 TWD 40 TWD 30 TWD) 120
No. of units to be sold 5,00,000
Total Profit ( 120 TWD 5,00,000 units) 6,00,00,000
Corporate Tax @ 25% 1,50,00,000

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Problem-15

Standard Corporation Inc. (SCI) is a US based multinational company engaged in manufacturing


and marketing of Printers and Scanners. It has subsidiaries spreading across the world which
either manufactures or sales Printers and Scanners using the brand name of SCI.
The Indian subsidiary of the SCI buys an important component for the Printers and Scanners
from the Chinese subsidiary of the same MNC group. The Indian subsidiary buys 1,50,000
units of components per annum from the Chinese subsidiary at CNY () 30 per unit and pays
a total custom duty of 29.5% of value of the components purchased.
A Japanese MNC which manufactures the same component which is used in the Printer and
Scanners of SCI, has a manufacturing unit in India and is ready to supply the same
component to the Indian subsidiary of SCI at ` 320 per unit.
The SCI is examining the proposal of the Japanese manufacturer and asked its Chines subsid-
iary to presents its views on this issue. The Chinese subsidiary of the SCI has informed that
it will be able to sell 1,20,000 units of the components to the local Chinese manufactures
at the same price i.e. 30 per unit but it will incur an excise duty @ 10% on sales value.
Variable cost per unit of manufacturing the component is 20 per unit. The Fixed Costs of the
subsidiaries will remain unchanged.
The Corporation tax rates and currency exchange rates are as follows:

Corporation Tax Rates Currency Exchange Rates


China 25% 1 US Dollar ($) = `61.50
India 34% 1 US Dollar ($) = 6.25
USA 40% 1 CNY () = ` 9.80

Required
(i) Prepare a financial appraisal for the impact of the proposal by the Japanese
manufacturer to supply components for Printers and Scanners to Indian subsidiary of
SCI. [Present your solution in Indian Currency and its equivalent.]
(ii) Identify other issues that would be considered by the SCI in relation to this proposal.

NOTE
While doing this problem use the only information provided in the problem itself and ignore
the actual taxation rules or treaties prevails in the above mentioned countries

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Ammendment Mat With Solution


Solution

(i) Impact of the Proposal by the Japanese Manufacturer to Supply Components for
Printers and Scanners to the Indian Subsidiary of the SCI.

On Indian Subsidiary of SCI


Particulars Amount (`)
Cost of Purchase from the Chinese Manufacturer :

Invoiced Amount {(1,50,000 units 30) `9.80} 4,41,00,000

Add: Total Custom Duty (` 4,41,00,000 29.5%) 1,30,09,500


Total Cost of Purchase from the Chinese Manufacturer (A) 5,71,09,500
Cost of Purchase from Japanese Manufacturer in India:

Invoice Amount (1,50,000 units `320) 4,80,00,000


Total Cost of Purchase from Japanese Manufacturer in India (B) 4,80,00,000
Savings on Purchase Cost Before Corporate Taxes (A) (B) 91,09,500
Less: Corporate Tax @34% 30,97,230
Savings after Corporate Taxes 60,12,270

On Chinese Subsidiary of SCI
Particulars Amount (`)
Loss of Contribution 29,40,000
[{(1,50,000 1,20,000 units) (30 20)} `9.80]
Add: Excise Duty on Local Sale - Chinese Manufacturer 35,28,000
[{(1,20,000 units 30) 10%} `9.80]
Total Loss Before Corporate Taxes 64,68,000
Less: Tax Savings on the Losses (`64,68,000 25%) 16,17,000
Net Loss after Corporate taxes 48,51,000

On SCI Group
Particulars Amount (`)
Saving from Indian Subsidiary 60,12,270
Loss from Chinese Subsidiary 48,17,000
Net Benefit to SCI Group 11,61,270
From the above analysis it can be seen that the proposal from the Japanese manufacturer
in India is beneficial for the SCI as it give a net benefit of ` 11,61,270.

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Ammendment Mat With Solution


(ii) The SCI need to consider various other issues before reaching at a final decision of
accepting the proposal of the Japanese manufacturer in India. The few suggestive issues
that should be considered are as follows.
The longevity of the proposal of the Japanese manufacturer: Whether Japanese manufacturer
will supply the components in the future also. For this purpose a long term agreement
between the Indian Subsidiary of SCI and Japanese manufacturer in India needs to be
entered.
Certainty of the fiscal policy in India: The Japanese manufacturer will not be able to supply
the component at the present price if the fiscal policy of India will change in the
future.
Repatriation of Profit earned in India: Though the Indian subsidiary is making profit but
it depends on the Government policy on the repatriation of profit from India to USA.
Operating Conditions in China: The SCI has to make sure that the Chinese subsidiary
is operating profitably and able to use the spare capacity in the future as well.
The fiscal policy in China: If the Government of China liberalize its fiscal policies in China
in future then the manufacturing cost will be cheaper than the todays cost.
Apart from above suggestive points the foreign relations and other tax treaties and
accords should also be kept in consideration.

O. Drum Buffer Rope Theory of Constraints


When there is an internal constraint, there are very few resources (people, machines,
equipment, materials) dictating the output of the system. The most limiting resource is referred
to as the Drum as it determines the pace or beat of the entire system. FollowingStep 2 -
Decide how to Exploit the Systems Constraint(s), the constraint resource cannot be allowed
to waste one moment of its capacity. This means that it should never be stopped waiting for
parts and should not use capacity producing anything other than the parts required to fulfill
sales orders. To ensure this we finitely schedule the Drum creating aDrum Schedule. The Drum
schedule should maximise the Throughput of the Constraint and provide a detailed plan for just
this one area. The Drum Schedule must be derived from the Shipping Schedule.
Following step 3 -Subordinate everything else to the above decisions, there are a number of
actions that have to be met by the non-constraints in the system in order to meet theDrum
Schedule and ultimately the shipping schedule. As discussed earlier, variation and Murphy
cause, from time to time, pieces of plant to break down. Understanding that we have to protect
the constraint from lost capacity due to these breakdowns, a Buffer of time is used. The
Constraint buffer is a pre-determined length of time; we must release the order into the system
before the order is due on the Drum Schedule. As all other resources have more capacity than
the constraint (by definition), the effect of introducing parts a buffer time before they are due at
the constraint is that work builds up in front of the constraint and protects it from breakdowns
on preceding operations.
To ensure that too much inventory is not introduced into the system, it is important to start a
new order only as the constraint finishes one. To ensure this, aRopeis tied to the first (gating)
operation of the system. This is calculated by the date the order appears on the Drum Schedule
minus the Constraint Buffer time giving a schedule for material release into the system. We
have now choked the release of work into the system.

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Ammendment Mat With Solution


To ensure the Shipping Schedule is met after meeting the Drum Schedule a rope is tied from
the Drum to the Shipping Schedule. The rope length is a buffer of time to ensure the shipping
schedule is always met; this is called the shipping buffer.
This choking of release results in excess capacity being revealed in the non-constraints in front
of and behind the Drum. This can have negative ramifications and must be properly handled
in implementation; otherwise non-constraint resources will slow down to protect themselves
from perceived negative consequences of not being busy all the time. This will of course impact
Throughput and delivery performance.

P. Profitability Analysis Growth, Price Recovery and Productivity


Effect
Aditya Decors Ltd. (ADL) is a leading manufacturer of luxury sanitary products and has divided
its whole business into different product segments. At the Last year the management of ADL
has decided to make some changes in its one of product-line AADee the improved version was
made available for sale from 1st of April 2014.
At the end of the financial year 2014-15, the finance and accounts department has extracted
some relevant data for the product line AADee to analyse the decision taken last year.The data
related with AADee for the financial year 2013-14 and 2014-15 are as follows:
2013-14 2014-15

No. of Units Sold 4,00,000 4,30,000


Selling Price per unit 4,175 4,325
Direct Materials Consumed 24,00,000 kg. 25,10,000 kg.
Cost per kg. Of Direct Materials 470 485
Direct Labour Used 32,00,000 hrs. 34,80,000 hrs.
Rate per labour hour 30 31
Fixed Costs 1,60,00,000 1,76,00,000
ADL has the capacity to produce 5,00,000 units of AADee a year.
Show RECONCILIATION of Operating Profit from 2013-14 to 2014-15.

Solution:
Reconciliation of Operating Profit from 2013-14 to 2014-15

Amount (`) Amount (`)


Operating Profit in 2013-14 (Refer to Working Note) 43,00,00,000
Add: Revenue effect of Growth Component 12,52,50,000
Revenue effect of Price-Recovery 6,45,00,000
Productivity Component (Direct Material) 3,39,50,000 22,37,00,000
Less: Cost effect of Growth Component (Direct Material) 8,46,00,000
Cost effect of Growth Component (Direct Labour) 72,00,000
Cost effect of Price-Recovery (Direct Material) 3,87,00,000
Cost effect of Price-Recovery (Direct Labour) 34,40,000

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Amount (`) Amount (`)
Cost effect of Price-Recovery (Fixed Cost) 16,00,000
Productivity Component (Direct Labour) 12,40,000 13,67,80,000
51,69,20,000

Q. Case Study Based Theory Questions

1. Total Quality Management

Problem-1

Quality products can be determined by using a few of the dimensions of quality. Identify the
following under the appropriate dimension:
(i) Consistency of performance over time.
(ii) Primary product characteristics.
(iii) Exterior finish of a product
(iv) Useful life of a product.

Solution
Quality of Products with Appropriate Dimension

Sl. No Quality of Products (Examples) Dimension


(i) Consistency of performance over time Reliability
(ii) Primary product characteristics Performance
(iii) Exterior finish of a product Aesthetics
(iv) Useful like of a product Durability

Problem-2
Classify the following items under appropriate categories of equality costs viz. Prevention
Costs, appraisal Cost, Internal Failure Costs and External Failure costs:
(i) Rework
(ii) Scrap
(iii) Warranty Repairs
(iv) Revenue loss
(v) Repair to manufacturing equipment
(vi) Discount on defective sale
(vii) Establishment of quality circles
(viii) Packaging inspection

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Solution

(i) Rework ----- Internal Failure


(ii) Scrap ----- Internal Failure
(iii) Warranty Repairs ----- External Failure
(iv) Revenue Loss ----- External Failure
(v) Repairs to Manufacturing Equipment ----- Internal Failure
(vi) Discount on Defective Sales ----- External Failure
(vii) Establishment of Quality Circles ----- Prevention Cost
(viii) Packaging Inspection ----- Appraisal Cost

Problem-3

A Ltd. is going to introduce Total Quality Management (TQM) in its company. State whether
and why the following are valid or not for the successful implementation of TQM.
(i) Some departments serve both the external and internal customers. These departments
have been advised to focus on satisfying the needs of the external customers.
(ii) Hold a training program at the beginning of a production cycle to ensure the
implementation of TQM.
(iii) Implement Management by Objectives for faster achievement of TQM.
(iv) Appoint the Head of each department as the person responsible to develop
improvement strategies and performance measures.
(v) Eliminate wastage of time by avoiding documentation and procedures.

Solution

Point Valid/ Invalid Reason


(i) Invalid TQM advocates focus to be given on
both external and internal customers.
Hence, focus satisfying the needs of the ex-
ternal customers only will not be valid for the
successful implementation of TQM.
(ii) Valid Training at the beginning would improve
productivity by bringing standardization in
work habits and eliminating variations in pro-
duction.
(iii) Invalid For implementation of TQM, Management by
Objectives should be eliminated as targets of
production will encourage delivery of poor
quality goods and thus will defeat the collec-
tive nature of TQM.

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(iv) Invalid Appointing the head of each department as the respon-
sible person is not valid for the successful implementa-
tion of TQM as Total Employee Involvement (TIE) prin-
ciple is an important part of TQM.
(v) Invalid Documentation, procedures and awareness of current
best practice are essential in TQM implementation. If
documentation and procedures are in place then only
improvement can be monitored & measured and con-
sequently deficiency can be corrected.

2. Activity Based Costing

Problem-4

State with a brief reason whether you would recommend an activity based system of costing
in each of the following independent situations:
(i) Company K produces one product. The overhead costs mainly consist of depreciation.
(ii) Company L produces 5 different products using different production facilities.
(iii) A consultancy firm consisting of lawyers, accountants and computer engineers provides
management consultancy services to clients.
(iv) Company S produces two different labour intensive products. The contribution per unit
in both products is very high. The BEP is very low. All the work is carried on efficiently
to meet the target costs.

Solution
Sl. No Description Recommend Reasons
ABC (Yes / No)
(i) K produces one prod- No One product situation. For alloca-
uct. Overhead is mainly tion of overhead, ABC is not required.
depreciation.
ABC for cost reduction not benefi-
cial since most of the overhead is de-
preciation.
(ii) L produces 5 different Yes Multi product situation. ABC is re-
products with different quired for allocation of overhead.
facilities. ABC is necessary for pricing.
Cost drivers are likely to be differ-
ent.
Cost reduction may be possible.
Production facilities are different.

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(iii) Professional ser- Yes Variety of services. Hence ABC
vices is required for cost allocation.
lawyers / Services are very different.
/ accountants / ABC is necessary for pricing.
computer engi- Cost reduction possible.
neers.
(iv) S produces 2 dif- No Different products, but labour in-
ferent labour in- tensive. Hence, overhead allocation
tensive products. based on readily traceable direct
High unit contri- labour cost will be accurate. Hence,
bution and effi- ABC not required for cost alloca-
cient operations. tion.
Low BEP level implies low level
of fixed cost as a % of sale price or
as a
% of total cost.
Many fixed cost activity driv-
ers are likely to align with the direct
labour costs. Hence not required for
cost allocation.
Efficient operation. Hence ABC
not required even for cost reduc-
tion or ABC management.
Problem-5

State whether each of the following independent activities is value-added or non-value-added:


(i) Polishing of furniture used by a systems engineer in a software firm.
(ii) Maintenance by a software company of receivables management software for a banking
company.
(iii) Painting of pencils manufactured by a pencil factory.
(iv) Cleaning of customers computer key boards by a computer repair centre.
(v) Providing, brake adjustments in cars received for service by a car service station.

Solution

Sl. No Item Value Added / Non


Value Added
(i) Polishing furniture used by a Systems Engineer in a Non-Value Added
software firm.
(ii) Maintenance by a software company of receivables Value-Added
management software for a banking company.
(iii) Painting of pencils manufactured by a pencil fac- Value-Added
tory.

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Sl. No Item Value Added / Non
Value Added
(iv) Customers computer key board cleaning by a Value-Added
computer repair centre.
(v) Providing brake adjustments in cars for repairs by Value-Added
a care service station.

Target Costing> Kaizen Costing


Problem-6

M. India Ltd. (MIL) is an automobile manufacturer in India and a subsidiary of Japanese


automobile and motorcycle manufacturer Leon. It manufactures and sells a complete range of
cars from the entry level to the hatchback to sedans and has a present market share of 22% of
the Indian passenger car markets. MIL uses a system of standard costing to set its budgets.
Budgets are set semi-annually by the Finance department after the approval of the Board of
Directors at MIL. The Finance department prepares variance reports each month for review
in the Board of Directors meeting, where actual performance is compared with the bud-
geted figures. Mr. Suzuki, group CEO of the Leon is of the opinion that Kaizen costing
method should be implemented as a system of planning and control in the MIL.

Required

Recommend key changes vital to MILs planning and control system to support the adoption
of Kaizen Costing Concepts.

Solution
Kaizen Costing emphasizes on small but continuous improvement. Targets once set at the
beginning of the year or activities are updated continuously to reflect the improvement that has
already been achieved and that are yet to be achieved.
The suggestive changes which are required to be adopted Kaizen Costing concepts in MIL are
as follows:
Standard Cost Control System to Cost Reduction System: Traditionally Standard Costing system as-
sumes stability in the current manufacturing process and standards are set keeping the nor-
mal manufacturing process into account thus the whole effort is on to meet performance cost
standard. On the other hand Kaizen Costing believes in continuous improvements in manu-
facturing processes and hence, the goal is to achieve cost reduction target. The first change
required is the standard setting methodology i.e. from earlier Cost Control System to Cost
Reduction System.

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Reduction in the periodicity of setting Standards and Variance Analysis: Under the existing
planning and control system followed by the MIL, standards are set semi-annually and based
on these standards monthly variance reports are generated for analysis. But under Kaizen
Costing system cost reduction targets are set for small periods say for a week or a month.
So the period covered under a standard should be reduced from semi-annually to monthly and
the current practice of generating variance reports may be continued or may be reduced
to a week.
Participation of Executives or Workers in standard setting: Under the Kaizen Costing system par-
ticipation of workers or executives who are actually involved in the manufacturing process
are highly appreciated while setting standards. So the current system of setting budgets and
standards by the Finance department with the mere consent of Board of Directors required
to be changed.

Problem-7

ABC Ltd. is planning to introduce Kaizen Costing approach in its manufacturing plant. State
whether and why the following are Valid or Not in respect of Kaizen Costing.
(i) VP (Finance) is of the view that company has to make a huge initial investment to bring
a large scale modification in production process.
(ii) Head (Personnel) has made a point that introduction of Kaizen Costing does not
eliminate the training requirement of employees.
(iii) General Manager (Manufacturing) firmly believes that only shop floor employees and
workers involvement is prerequisite of Kaizen Costing approach.
(iv) Manager (Operations) has concerns about creation of confusion among employees and
workers regarding their roles and degradation in quality of production.

Solution

(i) Invalid: Kaizen Costing is the system of cost reduction procedures which involves
making small and continuous improvements to the production processes rather than
innovations or large-scale investment.
(ii) Valid: The training of employees is very much a long-term and ongoing process in the
Kaizen costing approach. Training enhances the abilities of employees.
(iii) Invalid: Kaizen costing approach involves everyone from top management level to the
shop floor employees. Every employees active participation is a must requirement.
(iv) Invalid: Though the aim of Kaizen Costing is to reduce the cost but at the same time it
also aims to maintain the quality. Kaizen costing also aims to bring the clarity in roles and
responsibilities for all employees.

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Life Cycle Costing

Problem-8

Fiona is a news reporter and feature writer for an economic daily. Her assignment is to develop
a feature article on Product Life-Cycle Costing, including interviews with the Chief Financial
Officers (CFO) and Operating Managers. Fiona has been given a liberal budget for travel so
as to research into companys history, operations, and market analysis for the firm she selects
for the article.

Required
Fiona has asked you to recommend industries and firms that would be good candidates for
the article. What would you advice? Explain your recommendations.

Solution
The product life cycle span the time from the initial R & D on a product to when customer
service and support is no longer offered for that product.
Life Cycle Costing technique is particularly important when:
(i) High percentage of total life-cycle costs are incurred before production begins and
revenue are earned over several years and
(ii) High fraction of the life cycle costs are locked in at the R & D and design stages.

Fiona should identify those industries and then companies belonging to those industries where
above mentioned feature are prevalent. For example, Automobile and Pharmaceutical Industries
companies like Tata Motors Ltd., Ranbaxy Laboratories Ltd., and Dabur India Ltd. will be good
candidates for study on product life cycle costing.

Cost Control Vs Cost Reduction

Problem-9

Classify the following items under the more appropriate category: Category (CC) Cost
Control Or Category (CR) Cost Reduction:
(i) Costs exceeding budgets or standards are investigated.
(ii) Preventive function
(iii) Corrective function
(iv) Measures to standardize for increasing productivity
(v) Provision of proper storage facilities for materials.

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(vi) Continuous comparison of actual with the standards set.
(vii) Challenges the standards set
(viii) Value analysis

Solution
Classification of Items under Cost Reduction (CR)/ Cost Control (CC)

Sl. No. Item Category


CC/ CR
(i) Costs exceeding budgets or standards are investigated CC
(ii) Preventive function CC
(iii) Corrective function CR
(iv) Measures to standardize for increasing productivity CR
(v) Provision of proper storage facilities for materials CC
(vi) Continuous comparison of actual with the standards set CC

(vii) Challenges the standards set CR


(viii) Value analysis CR

Value Chain Analysis

Problem-10

ABC Ltd. is engaged in business of manufacturing branded readymade garments. It has a


single manufacturing facility at Ludhiana. Raw material is supplied by various suppliers.
Majority of its revenue comes from export to Euro Zone and US. To strengthen its posi-
tion further in the Global Market, it is planning to enhance quality and provide assurance
through long term warranty.
For the coming years company has set objective to reduce the quality costs in each of the
primary activities in its value chain.

Required
State the primary activities as per Porters Value Chain Analysis in the value chain of ABC Ltd
with brief description.

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Solution
Primary activities are the activities that are directly involved in transforming inputs into out-
puts and delivery and after-sales support to output. Following are the primary activities in the
value chain of ABC Ltd.:-
(i) Inbound Logistics: These activities are related to the material handling and
warehousing. It also covers transporting raw material from the supplier to the place of
processing inside the factory.
(ii) Operations: These activities are directly responsible for the transformation of raw
material into final product for the delivery to the consumers.
(iii) Outbound Logistics: These activities are involved in movement of finished goods to
the point of sales. Order processing and distribution are major part of these activities.
(iv) Marketing and Sales: These activities are performed for demand creation and
customer solicitation. Communication, pricing and channel management are major part
of these activities.
(v) Service: These activities are performed after selling the goods to the consumers.
Installation, repair and parts replacement are some examples of these activities.

Problem-11
Examine the Validity of following statements along with the reasons:

(i) The concepts, tools and techniques of value chain analysis apply only to all those organizations
which produce and sell a product.
(ii) Procurement activities are included in the Primary activities as classified by Porter
under value chain analysis concept.
(iii) As per Porters five forces model, bargaining power of buyers does influence the
profitability of an industry or market.
(iv) Value chain analysis in the strategic framework consists of single cost driver concept.

Solution
(i) Invalid
The concepts, tools and techniques of value chain analysis apply to organizations which
produce and sell a product and also to organizations which provide a service.

(ii) Invalid
Procurement activities are included in the support activities rather than primary
activities.

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(iii) Valid
Bargaining power of buyers is one of the factor or force that influences the profitability
of a market or industry. More the bargaining power buyers have, more the pressure on
the industry to not increase the price of product or service. They may even have to
reduce the price sometimes.
(iv) Invalid
Value chain analysis in the strategic framework consists of multiple cost drivers concept. In
value chain analysis, a set of unique cost drivers is identified for each value activity instead
of single cost driver application at the overall firm level. Multiple cost drivers may be
classified into Structural drivers and Executional drivers.

Target Costing - Value Chain Analysis - Porters Value Chain


6. Classify the following business activites into primary and support activities under value chain
analysis.
(i) Material Handling and warehousing Primary
(ii) Purchasing of raw materials, supplies and other consumables Support
(iii) Order Processing and distribution - Primary
(iv) Selection, placement and promotion of employees - Support
(v) Installation, repair and parts replacement Primary
(vi) Transforming input into final products Primary
(vii) General Management, Planning, finance, accounting - Support
(ix) Communication, pricing and channel management - Primary

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Just In Time

Problem-12
Indian Petrons Ltd. (IPL) is a leading manufacturing company. Under increasing pressure to
reduce costs, to contain inventory and to improve service, IPLs Costing Department has
recently undertaken a decision to implement a JIT System.
The management of IPL is convinced of the benefits of their changes. But Supplies Manager
Mr. Brian fears with the Costing Departments decision. He said:
Weve been driven by suppliers for years ... they would insist that we could only purchase
in thousands, that we would have to wait weeks, or that they would only deliver on Mondays!
Is Mr. Brians view point correct and why?

Solution
JIT Inventory System

For successful operation of JIT inventory system, the suppliers chosen must be willing
to make frequent deliveries in small lots. Rather than deliver a weeks or a months material
at one time, suppliers must be willing to make deliveries several times a day and in the
exact quantities specified by the buyer.
It is described in the problem that suppliers are not willing to
- make frequent deliveries and
- make supplies in the exact quantities as required
Accordingly Mr. Brians doubt is correct on successful implementation of JIT System.

Pricing Policy/ Strategy

Problem-1
Rapid Heal Tech Ltd. (RHTL) is a leading IT security solutions and ISO 9001 certified
company. The solutions are well integrated systems that simplify IT security management
across the length and depth of devices and on multiple platforms. RHTL has recently
developed an Antivirus Software and company expects to have life cycle of less than one
year. It was decided that it would be appropriate to adopt a market skimming pricing policy
for the launch of the product. This Software is currently in the Introduction stage of its life
cycle and is generating significant unit profits.

Required
(i) Explain, with reasons, the changes, if any, to the unit selling price that could occur
when the Software moves from the Introduction stageto Growth stage of its life cycle.
(ii) Also suggest necessary strategies at this stage.

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Solution

Following acceptance by early innovators, conventional consumers start following their


lead. New competitors are likely to now enter the market attracted by the opportunities
for large scale production and profit. RHTL may wish to discourage competitors from
entering the market by lowering the price and thereby lowering the unit profitability. The price
needs to be lowered so that the product becomes attractive to different market segments
thus increasing demand to achieve the growth in sales volume.

Strategies at this stage may include the following


(i) Improving quality and adding new features such as Data Theft Protection, Parental
Control, Web Protection, Improved Scan Engine, Anti Spyware, Anti Malware etc. (ii)
Sourcing new market segments/ distribution channels.
(iii) Changing marketing strategy to increase demand.
(iv) Lowering price to attract price-sensitive buyers.

Problem-2
State the appropriate pricing policy in each of the following independent situations:

(i) A is a new product for the company and the market and meant for large scale
production and long term survival in the market. Demand is expected to be elastic.
(ii) B is a new product for the company, but not for the market. Bs success is crucial for
the companys survival in the long term.
(iii) C is a new product to the company and the market. It has an inelastic market. There
needs to be an assured profit to cover high initial costs and the usual sources of capital
have uncertainties blocking them.
(iv) D is a perishable item, with more than 80% of its shelf life over.

Solution

Situation Appropriate Pricing


Policy
(i) A is a new product for the company and the mar- Penetration Pricing
ket and meant for large scale production and long
term survival in the market. Demand is expected
to be elastic.
(ii) B is a new product for the company, but not for Market Price or Price Just
the market. Bs success is crucial for the companys Below Market Price
survival in the long term.

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Situation Appropriate Pricing
Policy
(iii) C is a new product to the company and the mar- Skimming Pricing
ket. It has an inelastic market. There needs to be
an assured profit to cover high initial costs and
the unusual sources of capital have uncertainties
blocking them.
(iv) D is a perishable item, with more than 80% of its Any Cash Realizable Value*
shelf life over.
(*) this amount decreases every passing day.

Problem-3

State the most appropriate pricing policy to be adopted in the following independent situa-
tions:
(i) Modern patented drug entering the market.
(ii) The latest version of a mobile phone is being launched by an established, financially
strong company.
(iii) An established company has recently entered the stationery market segment and launched
good quality paper for printing at home and office.
(iv) A car manufacturer is launching an innovative, technologically advanced car in the highly
priced segment.

Solution

Situation Appropriate Pric-


ing Policy
(i) Modern patented drug entering the market. Skimming Pricing
(ii) The latest version of a mobile phone is being launched by an Penetration Pricing
established, financially strong company.
(iii) An established company has recently entered the stationery Market Price
market segment and launched good quality paper for printing at
home and office.
(iv) A car manufacturer is launching an innovative, technologically Skimming Pricing
advanced car in the highly priced segment.

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Zero Based Budgeting

Problem-3

Metro Communication Limited is a state-owned large public company in the telecommunica-


tions sector. One of its main planning and control tools is the preparation and use of tradi-
tional annual budgets. Its divisional structure is as under:

Division T, A and RD incur substantial amount on discretionary expenses.

Required
Identify the possibilities of introducing a Zero Based Budgeting system for Division T, A and RD.

Solution
Discretionary costs are those that are incurred, typically each year, in an amount that
is approved as part of the normal budget process. However, there is no clear relation-
ship between the volume of services and the amount of cost that must be incurred. Manager
must decide and justify the level that is deemed to be appropriate. This justification is to be
made a fresh without making reference to previous level of spending in his/her department.
Zero based budgeting is undoubtedly most effective in terms of discretionary costs. The
bottom line of a zero based budgeting is that it is important to understand what types
of objectives are being accomplished by discretionary cost centers and what resources
being devoted to accomplishing various objectives. This will allows a prioritization,
so that organization can evaluate the likely impact of substantial increase or decrease
in the resources allocated to the discretionary center.
Accordingly, ZBB has extensive potential application to the division T, A and RD.

Problem-4

In each of the following independent situations, state with a brief reason whether Zero Based
Budgeting (ZBB) or Traditional Budgeting (TB) would be more appropriate for year II.

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(i) A company producing a certain product has done extensive ZBB exercise in year I. The
activity level is expected to marginally increase in year II.
(ii) The sale manager of a company selling three products has intuitive feeling that in year
II, sales will increase for one product and decrease for the other two. His expectation
can not be substantiated with figures.
(iii) The top management would like to delegate responsibility to the functional managers
for their results during year II.
(iv) Resources are heavily constrained and allocation for budget requirements is very strict.

Solution

(i) The company has done extensive exercise in year-I that can be used as a basis for
budgeting in year-II by incorporating increase in costs / revenue at expected activity
level. Hence, Traditional Budgeting would be more appropriate for the company in
year-II.
(ii) In Traditional Budgeting system budgets are prepared on the basis of previous years
budget figures with expected change in activity level and corresponding adjustment in
the cost and prices. But under Zero Base Budgeting (ZBB) the estimations or projections are
converted into figures. Since, sales manager is unable to substantiate his expectations into
figures so Traditional Budgeting would be preferred against Zero Base Budgeting.
(iii) Zero Base Budgeting would be appropriate as ZBB allows top-level strategic goals
to be implemented into the budgeting process by tying them to specific functional areas
of the organization, where costs can be first grouped, then measured against previous
results and current expectations.
(iv) Zero Base Budgeting allocates resources based on order of priority up to the spending
cut-off level (maximum level upto which spending can be made). In an organisation
where resources are constrained and budget is allocated on requirement basis, Zero
Base Budgeting is more appropriate method of budgeting.

Transfer Pricing -
Problem-16

Fox-2-Tec Ltd (F2TL) has Division Dx and Division Dz with full profit responsibility. The Divi-
sion Dx produces Component X which it sells to outside customers only. The Division
Dz produces a product called the Z which incorporates Component X in its design. Dz
Division is currently purchasing 2,500 units of Component X per year from an outside sup-
plier at a cost of ` 35 per unit, less a 10 percent quantity discount. Dx Division can sell its
entire Component X to outside customers at the normal ` 35 price. Costs associated
with manufacturing of a unit of Component X are as follows:
Variable Expenses ` 21
Fixed (based on a capacity of 25,000 units per year) `9
F2TLs new managing director agrees for internal transfer if an acceptable transfer price can
be worked out. Accordingly, he requires solution of following questions:-

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(i) If the Dz Division purchases 2,500 units of Component X per year from the Dx
Division, what price should control the transfers? Why?
(ii) Refer to your computations in (1). What is the lower limit and the upper limit for
a transfer price? Is an upper limit relevant in this situation?
(iii) If the Dx Division meets the price that the Dz Division is currently paying to
its supplier and sells 2,500 units of Component X to the Dz Division each year, what
will be the effect on the profits of the Dx Division, the Dz Division, and the company as a
whole?
(iv) If the intermediate market price for Component X is ` 35 per unit, is there any reason
why the Dx Division should sell to the Dz Division for less than ` 35? Explain.

Solution

(i) The transfer price should be `35 per unit, the regular price charged to other customers.
Since the Dx Division is operating at capacity, it will lose `14 in contribution margin for
each outside sale given up in favor of sales to the Dz Division (` 35 ` 21 = `14).
Transfer Price = Variable Cost per unit + Lost Contribution Margin per unit on outside sells
= ` 21 + ` 14
= ` 35
(ii) The lower limit is `35, the price obtained in (1). The upper limit is also `35, since `35 is
the intermediate market price. That is, it would not be fair to charge the other Division
more than the price being charged to regular customers. However, an upper limit is not
really relevant in this situation since no transfers will be made between the two
Divisions.
(iii) The price being paid to the outside supplier, net of the quantity discount, is only `31.50.
If this price is met by the Dx Division, then profits in the Dx Division and in
the company as a whole will drop by `8,750 per year.
Minimum Transfer Price `35
Outside Suppliers Price `31.50
Loss in Contribution Margin per unit `3.50
No. of units per year 2,500
Total Loss in Profits `8,750
Profits in the Dz Division will remain unchanged, since it will be paying the same price
internally as it is now paying externally.
(iv) Yes, if costs can be avoided as a result of the inside business. The price would then be `35
less the avoided costs.

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Uniform Costing and Inter Firm Comparison
Question-1
What are the requisites for the installation of a Uniform Costing system?

Answer
Essential requisites for the installation of Uniform Costing are as under:
(i) The firm in the industry should be willing to share or furnish relevant data or information.
(ii) A spirit of co-operation and mutual trust should prevail among the participating firms.
(iii) Mutual exchange of ideas, methods used, special achievement made, research and
know- how etc. should be frequent.
(iv) Bigger firms should take the lead towards sharing their experience and know- how with
the smaller firm to enable the later to improve their performance.
(v) In case of accounting methods, principles, procedure and production method uniformity
must be established.

Question-2
What is Uniform Costing? Why is it recommended?

Answer

It is not a distinct method of costing when several undertakings start using the same costing
principles or practices, they are said to be following uniform costing. Different concerns in an
industry should adopt a common method of costing and apply uniformly the same prin-
ciples and techniques for better cost comparison and common good and helps in mutual cost
control and cost reduction. Hence, it is recommended that a uniform method of costing
should be adopted by the member units of an industry.

Question-3
State the limitations of Uniform Costing.

Answer
Limitations of Uniform Costing are:

(i) Sometimes it is not possible to adopt uniform standards, methods and procedures of
costing in different firms due to differing circumstances in which they operate. Hence,
the adoption of uniform costing becomes difficult in such firms.
(ii) Disclosure of cost information and other data is an essential requirement of a uniform
costing system. Many firms do not wish to share such information with their competitors
in the same industry.
(iii) Small firms in an industry believe that uniform costing system is only meant for big and
medium size firms, because they cannot afford it.

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(iv) It induces monopolistic trend in the business, due to which prices may be increased
artificially and supplies withheld.

Question-4

What are the advantages of Uniform Costing?

Answer
The advantages accruing from the use of Uniform Costing System are as follows:
(i) The management of each firm will be saved from the exercise of developing and
introducing a costing system of its own.
(ii) A costing system devised by mutual consultation and after considering the difficulties and
circumstances prevailing in different firms is readily adopted and successfully implemented.
(iii) It facilitates comparison of cost figures of various firms to enable the firms to identify
their weak and strong points besides controlling costs.
(iv) Optimum achievement of efficiency is attempted by all the firms by utilising the
experience of other concerns in the industry.
(v) Standing in the industry of each firm will be known by making a comparison of its cost
data with others.
(vi) Services of cost consultants or experts may be available jointly to each firm in the industry
by sharing their experiences and expenses.
(vii) Research and development benefits of bigger firms may be made available to smaller
firms.
(viii) It helps in the reduction of labour turnover, as a uniform wage system is the pre- condition
of a uniform costing system.
(ix) It helps Trade Associations in negotiating with the Government for any assistance or
concession in the matters of taxation, exports, subsidies, duties and prices determination
etc.
(x) Unhealthy competition is avoided among the firms in the same industry in framing
pricing policies and submitting tenders.
(xi) Prices fixed on the basis of uniform costing are representative of the whole industry and
thus are reliable.
(xii) Uniform costing provides a basis for the comparative assessment of the performance of
two firms in the same industry but in different sectors.
(xiii) It helps the Government in regulating the prices of essential commodities such as
bread, sugar, cement, steel etc.

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Question-5
Enumerate the objectives of Uniform Costing.

Answer

The main objectives of Uniform Costing are as follows:

(i) Facilitates Comparison: To facilitate the comparison of costs and performances of


different units in the same industry; it provides objective basis.
(ii) Eliminates Unhealthy Competition: To eliminate unhealthy competition among the
different units of an industry.
(iii) Improves Efficiency: To improve production capacity level and labour efficiency by
comparing the production costs of different units with each other.
(iv) Provides Relevant Data: To provide relevant cost information/ data to the Government
for fixing and regulating prices of the products.
(v) Ensures Standardisation: To bring standardisation and uniformity in the operation
of participating units.
(vi) Reduces Cost: To reduce production, administration, selling and distribution costs, and
to exercise control on fixed costs.

Inter-firm Comparison

Question-6
What are the advantages of Inter-firm Comparison?

Answer
The main advantages of Inter-firm Comparison are:

(i) Such a comparison gives an overall view of the industry as a whole to its members. The
present position of the industry, progress made during the past and the future of the
industry.
(ii) It helps a concern in knowing its strengths or weaknesses in relation to others so that
remedial measures may be taken.
(iii) It ensures an unbiased specialized reporting on particular problems of the concern. (iv)
It develops cost consciousness among members of the industry.
(v) It helps Government in effecting price regulation.
(vi) It helps to improve the quality of products manufactured and to reduce the cost of
production. It is thus advantageous to the industry as well as to the society.

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Question-7
What are the limitations of Inter-firm Comparison?

Answer
The following are the limitations in the implementation of a scheme of Inter-firm Comparison:

(i) There is a fear of losing secrecy of the production method or some peculiar process or
method among the top management..
(ii) Middle management is usually not convinced with the utility of such a comparison.
(iii) In the absence of a suitable cost accounting system, the figures supplied may not be
reliable for the purpose of comparison.
(iv) Suitable basis for comparison may not be available.

Balanced Scorecard- Resort

Problem-1
Hard Rock Coconut is an exclusive resort located in a famous Island of Pacific Ocean that
vows to isolate its guests from the hustle and bustle of everyday life. Its leading principle is all
contemporary amenity wrapped in old-world charisma. Each of the resorts 18 villas has a
separate theme like Castle, Majestic, Ambassador, Royal Chateau, Coconut, Lemon, Balinese
etc and guests often ask for a specific villa when they make reservations. Villas are Ideal for
families or friends travelling together and these villas feature luxurious accommodation
spanning two floors. Since it is located within a 300-acre estate on white sand beach, the
resort offers its guests a wide variety of outdoor activities such as horseback riding, hiking,
diving, snorkeling, sailing, golf and so on. Guests could also while away the day relaxing in the
pool and availing themselves of the resorts world-famous spa Hard Coco Spa. The din-
ing room, which only has three tables for the public, is acceptable proud of its 4-star rating.
Required
Develop a Balanced Scorecard for Hard Rock Coconut. It is sufficient to give two measures
in each of the four perspectives.

Solution
The following is a possible Balanced Scorecard for Hard Rock Coconut

Financial Perspective Economic Value Added


Revenue per villa
Customer Perspective % repeat customers
Number of customer complaints
Internal Business Service rating of spa
Staff hours per guest

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% cost spent for maintenance
Travel guide rank for restaurant
Innovation and Learning Employee retention
Number of new services offered

Balanced Scorecard- Supermarket


Problem-2

ABC Ltd. has supermarkets located in most towns and cities. Over the last few years, profits
have fallen. ABC Ltd. has recognized that customer care has been paid insufficient attention.
ABC Ltd. has now realized the importance of the customer experience at its supermarkets.
ABC Ltd. has introduced a loyalty card scheme that rewards customers with discount vouchers
based on their spend and buying patterns at supermarkets in an attempt to earn the loyalty
of its customers.
The management of ABC Ltd. is considering the introduction of a Balanced Scorecard
approach to manage the performance of its stores.

Required
Recommend an objective and a suitable performance measure for each of three non-financial
perspectives of a Balanced Scorecard that ABC Ltd. could use to support its new strategy of
improving the customer experience. You should state three perspectives, an objective and
a performance measure for each one of the three perspectives.
Solution

Non- Financial Perspective Objective Performance Measure


Customer Perspective Increase the customer loyalty. Percentage of customers using loy-
alty cards.
Or Retaining the existing cus-
tomers. Or
No. of discount vouchers redeemed.

Internal Business For customers to pay for goods Time spent by customers in queuing
in a reasonable time. to pay for products at a check out.
Perspectives
Or Or
Paying proper attention to the Time spent by customers care ex-
customers and their product en- ecutives in handling customers que-
quiries. ries.
Or Or
Provide necessary support to No. of times home delivery made.
the existing loyal customers.

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Learning and Growth Perspec- To have qualified staffs able to No. of staff training days
tives meet the needs of the customers
or
Or Adding new products for new
No. of schemes launched
segments

Balanced Scorecard- Banking Company

Problem-3
Classify the following measures under appropriate categories in a Balanced Scorecard for
a banking company which excels in it s home loan products:
(i) A new product related to life insurance is being considered for a tie up with the
successful housing loan disbursements.
e.g. every housing loan applicant to be advised to take a life policy or compelled to take
a fire insurance policy.
(ii) How different sectors of housing loans with different interest rates have been sanctioned,
their volumes of growth in the past 4 quarters.
(iii) How many days are taken to service a loan, how many loans have taken longer, what
additional loans are to be released soon, etc.

Solution

(i) New Product tie up --- Innovation / Learning Perspective


(ii) Growth of Volume --- Financial Perspective
(iii) Time for Loan / Fresh Products --- Customer Perspective

Problem-4

Your Bank Ltd., was established on the 30th September, 1940 under the provisions of
Co- operative Societies Act by the eminent professionals to encourage self-help, thrift, coop-
eration among members. Bank was issued Banking License under Banking Regulation Act,
1949 on October 25, 1986 to carry out the Banking Business within the national capital and
since then the Bank has been growing continuously. At present, Bank has large number of
membership of individuals from different sections. The Bank has 12 branches in the NCT
of Delhi. Bank offers traditional counter service. Opening hours are designed to coincide
with local market days.
Board of Directors were worried from growing popularity of new style banks. These banks offer
diverse range of services such as direct access to executive management, a single point of
contact to coordinate all banking needs, appointment banking to save time, free online
banking services 24/7, free unlimited ATM access etc.
It has now been decided that the bank will focus on What Customers Want and will use
a balanced scorecard to achieve this goal.

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Required
Produce, for each of the three non-financial perspectives of a Balanced Scorecard, an
objective and a performance measure that the bank could use with appropriate reason.

Solution
Internal Business Process Perspective
Objective: Cross-sell Products
Measure: Products Purchased per customer
Reason: Cross-selling, or encouragement customers to purchase additional products e.g. insur-
ance, forex etc. is a measure of customer satisfaction. Only if a service is perceived as highly
satisfactory the service would be repeated/ additional products or services would be ac-
cepted.
Learning and Growth Perspective
Objective: Increase the Number of New Products or Services Sold
Measure: Number of Customers Buying the New Products/ New Services
Reason: Long term financial success requires bank to create new products / services (e.g.
internet banking, ATM access) that will meet emerging needs of current / future custom-
ers such as 24/7 banking.
Customer Perspective
Objective: Increase Customer Loyalty
Measure: Number of Accounts Closed or Closure Request Received
Reason: Customer loyalty describes the extent to which bank maintains durable relations to
its customers. The share of existing customers should have a high importance as it indicates
about image and reputation. Closure request is not a good sign for bank. Bank should investigate
reasons for the same and take appropriate actions to improve services offered to retain
customers.

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Balanced Scorecard- Telecom Company

Problem-5
Standard Telecom Ltd. is a leading cellular service provider having a global presence. It aims
to be the most innovative and trusted telecom company in the world. To achieve this aim, it is
constantly working on its overall functioning. It is trying to adopt best managements prac-
tices in the world. Following are some information related to the companys performance
for a particular period:

Particulars Current Year Base Year Target


Operating Ratio 60% 54% Reduce it to 50%
Average Revenue per user ` 225 `210 Increase it to
`250
Unresolved Consumer Complaints 27,500 25,000 Reduce it by 20%
Customer Relationship Centres 280 200 Take the total to
250
Employee Coverage under Training Pro- 10% 8% At least 15%
gramme

Required
Evaluate the performance of the company using Balance Scorecard approach.

Solution

The balanced scorecard is a method which displays organisations performance into four dimen-
sions namely financial, customer, internal and innovation. The four dimensions acknowledge the
interest of shareholders, customers and employees taking into account of both long-term and
short-term goals. The detailed analysis of performance of the company using Balance Score-
card approach as follows:

(i) Financial Perspective: Operating ratio and average revenue will be covered in this
prospective. Company is unable to achieve its target of reducing operating ratio to
50% instead it has increased to 60%. Company is required to take appropriate steps to
control and manage its operating expenses. Average revenue per user has increased from
` 210 to ` 225 but remains short of targeted ` 250. This is also one of the reasons of
swelled operating ratio. Company can boost up its average revenue per user either by
increasing the price of its services or by providing more paid value added services.
(ii) Customer Perspective: Service complaints will be covered under this perspective. The
company had set a target of reducing unresolved complaints by 20% instead
unresolved complaints have risen by 10%[(27,500-25,000)/(25,000) 100]. It shows
dissatisfaction is increasing among the consumers which would adversely impact the
consumers general perception about the company and company may lose its
consumers in long run.

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(iii) Internal Business Perspective: Establishing customer relationship centres will be
covered under this perspective. Company has established 80 relationship centres in the
current period exceeding its target of 50 (250-200) to cater to the needs of existing
consumers as well as soliciting new consumers. This shows the seriousness of the
company towards the consumer satisfaction and would help them in the long run.
(iv) Learning and Growth Perspective: Employee training programmes are covered under
this perspective. Company had set a target to cover at least 15% employee
under its training programmes but covered only 10%. This could hurt capabilities of
the employees which are needed for long term growth of the organisation necessary
to achieve the objectives set in the previous three perspectives. People or the human
resource of the company is one of the three principle sources where organisational
learning and growth comes.

Balanced Scorecard- Fitness Centre

Problem-6

Fitness Solution is a family owned fitness club, founded in 2010 by Peter and Albert with tradi-
tional style equipment. Club commenced operations in February 2011 within a shopping mall
so that members after working out, can conveniently shop, dine, pick up their children from
enrichment classes or go to the cinema.
Peter and Albert, the owners, pride themselves for providing a customized / tailored pro-
gram by taking into account a persons medical history, present fitness level, fitness goals, fitness
interests and offer many other small amenities that might be difficult to get in a larger Fitness
Centre. They believe
Each individual is unique and requires a specialized program plan which should be customized
and tailored to his/her needs.
They have a number of loyal members even though they offer the traditional style equipment.
Peter and Albert take care of most of the routine operations, along with a small permanent
staff, and temporary staff.

Required

(i) Identify at least three Critical Success Factors for Fitness Solution.
(ii) Construct a Balance Scorecard for Fitness Solution. (2 measures for each of the 4
perspectives are sufficient)

Solution

(i) Fitness Solutions main Critical Success Factors are


(a) Developing and maintaining a high level of customer satisfaction.
(b) Offering facilities that are not much below that offered by competition.

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(c) Keeping a tight cap on costs as there is considerable competitive pressure in this
industry and entry barriers are not high.
(ii) The following is a possible Balance Scorecard for Fitness Solution

Financial Operating expenses relative to budget


Cash flow
Perspective
Total daily operating revenue
Customer Turnover rate among members
Customer satisfaction rate
Perspective
Internal Number of employee complaints
Number of equipment not available on average day (due to maintenance)
Perspective

Innovation and Number of new equipment put into service


Number of staff participating in training courses
Learning

Balanced Scorecard- Miscellaneous


Problem-7
Identify Balance Scorecard Perspectives from the following potential measures observed
in different business sectors (Healthcare/ Airlines/ Banking).
(i) Weekly Patient Complaints
(ii) Patient Satisfaction Survey
(iii) Flight Cancellation Rate
(iv) On-time Performance of an Airline
(v) Number of Grants Awarded to a Healthcare unit
(vi) Outstanding Loan Balances / Deposit Balances of a Banking Company
(vii) Employee Turnover Rate of a Healthcare unit
(viii) Patient Referral Rate
(ix) Non-interest Income of a Banking Company
(x) Lost of Bag Reports per 5,000 Passengers

Solution
Statement Showing Balance Scorecard Perspectives for Different Business Sec-
tors
Health Care Airlines Banking
Weekly Patient Complaints Internal Operating --- ---
Efficiency
Patient Satisfaction Survey Customer Service & --- ---
Satisfaction
Flight Cancellation Rate --- Customer Service ---
& Satisfaction

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On-time Performance of an Air- --- Internal Operating ---
line Efficiency
Number of Grants Awarded to a Learning and --- ---

Healthcare unit Growth


Outstanding Loan Balances / De- --- --- Financial
posit Balances of a Banking Com- Strength
pany
Employee Turnover Rate of a Learning and --- ---

Healthcare unit Growth


Patient Referral Rate Customer Service & --- ---
Satisfaction
Non-interest Income of a Bank- --- --- Financial
ing Strength
Company
Lost of Bag Reports per 5,000 --- Customer Service ---
Passengers & Satisfaction

Problem-8

In the context of a balanced scorecard, identify the perspectives of the following independent
situations:

Sl. No. Organisation Target Parameter Perspective


(i) Courier Company 100% on-time delivery of priority
dispatches.
(ii) Tuition Centre Set up class-on-internet facility for
better reach of more number of
students and absentees.
(iii) Computer Manufactur- Set up service centres is all major
ing Company cities for after sales support.

(iv) Government Taxation Ensure Computer training to all of-


Department ficers above a certain rank to im-
prove their capabilities.

Solution
Identification of Perspectives of Independent Situation - Balance Scorecard

Sl. No. Organization Perspective

(i) Courier Company Customer Perspective


(ii) Tuition Centre Learning and Growth Perspective

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(iii) Computer Manufacturing Company Internal Business Perspective
(iv) Government Taxation Department Learning and Growth Perspective

Simplex Method Miscellaneous Concepts


(Slack/ Surplus Variable, Shadow Price, Feasible/ Alternate Solution/ Optimal Solution) Prob-
lem-1
The following information is given relating to the simplex method of a linear program with
the usual notations.

Objective function:
Z = x1 + 5x2 (1)

Subject to:
6x1 + 8x2 12 (2)
5x1 +15x2 10 (3)
x1, x2 10 (4)
Let s1 be the variable introduced to restate (2) as an equality and let S2 and A2 be variables
to restate (3) as an equality.

Required
If the objective is to maximize Z,

(i) What will be the coefficients of S1, S2 and A2 in equation (1) and (3) restated as equality?
(ii) Identify the slack and surplus variables.
(iii) Which variables will form part of the initial solution? Why?
(iv) If the objective is to minimize Z what will be your answer to (i) above?

Solution

(i) Working

Introducing Slack/ Surplus/ Artificial Variables


In Case of Maximization

Z = x 1 + 5x2 + 0s1 + 0s2 MA2 (1)


Subject to: 6x1 + 8x2 + s1 = 12 (2)
5x1 + 15x2 s2+ A2 = 10 (3)
x1, x2, s1, s2, A2 0 (4)

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For Equation (1)
Coefficients of s1, s2, and A2 are 0, 0 and M respectively.

For Equation (3)

Coefficients of s1, s2, and A2 are 0, 1 and 1 respectively.


(ii) s1 is Slack Variable and s2 is Surplus Variable.
(iii) In any Maximisation problem, this tableau must satisfy the following requirements:

All the Slack Variables (and thus Surplus Variables as well) must form part of the initial
solution mix (basis).
The table must contain as many rows as there are constraints.
The elements in the columns of variables appearing in the basis must form a unit vector.

If s2 is included in the basis, the elements of the s2 will be 0 and 1 and thus not a unit vec-
tor. This is contrary to the non-negativity restriction i.e. all variables must have a positive
value. This problem is solved by adding an Artificial Variable (denoted by Ai ) to the equation,
that is, a variable that has a positive value. Artificial variables do not represent any quantity
relating to the decision problem and must not be present in the final solution (if at all they
do, it represents a situation of infeasibility). Accordingly, in the initial tableau we will place A2
along with s1 to eliminate the impact of them first.

(iv) Working

Introducing Slack/ Surplus/ Artificial Variables


In Case of Minimization
Z = x1 + 5x2 + 0s1 + 0s2 + MA2 (1)

Subject to:
6x1 + 8x2 + s1 = 12 ................... (2)
5x1 + 15x2 -s2 + A2 = 10 ....................(3)
x1, x2, s1, s2, A2 0 ......................(4)

For Equation (1)


Coefficients of s1, s2, and A2 are 0, 0 and M respectively.

For Equation (3)

Coefficients of s1, s2, and A2 are 0, 1 and 1 respectively.

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Problem-2
Given below is an iteration in a simplex table for a maximization objective linear programming product mix
problem for products X1, X2 and X3.

Cj 6 4 10 0 0 0
Basic
Variable Quantity X1 X2 X3 S1 S2 S3
0 S1 400 0 4/3 0 1 -1/3 0
6 X1 400 1 2/3 2 0 1/3 0
0 S3 400 0 5/3 0 0 -2/3 1
Zj 2,400 6 4 12 0 2 0
Cj - Z j 0 0 -2 0 -2 0

Answer the following questions:

(i) Is the above solution feasible?


(ii) Perform one more iteration with X 2 entering the solution to get a solution with the same
value for the objective function.
(iii) Indicate the shadow prices.
(iv) If customer is prepared to pay higher price for product X3 then by how much should the
price be increased so that the companys profit remains unchanged?
(v) From the given table, derive any one original constraint inequality with the coefficients
of variables in their simplest whole number forms.

Solution
Workings

C j 6 4 10 0 0 0 Min.
CB Basic Variable Quantity X1 X2 X3 S1 S2 S3 Ra-
tio
0 S1 400 0 4/3 0 1 1/3 0 300
6 X1 400 1 2/3 2 0 1/3 0 600
0 S3 400 0 5/3 0 0 2/3 1 f240
Zj = C Bi Xj 6 4 12 0 2 0

Cj - Zj 0 0 2 0 2 0

(i) Yes, because the given solution has no artificial variables in the basic column.
(ii) Perform one more iteration with X 2:

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Cj 6 4 10 0 0 0
CB Basic Quantity X1 X2 X3 S1 S2 S3
Variable
0 S1 80 0 0 0 1 1/5 4/5
6 X1 240 1 0 2 0 3/5 2/5
4 X2 240 0 1 0 0 2/5 3/5
Zj = C Bi Xj 6 4 12 0 2 0

Cj - Zj 0 0 2 0 2 0

(iii) Shadow Price is `0, `2 and `0 (or any other given monetary unit) for Constraint 1,
Constraint 2 and Constraint 3 respectively and same has been obtained from row
Cj - Zj .

(iv) Cj - Zj for X3 being 2, production of each unit of X3 would cause a reduction of `2


(or any other given monetary unit). Thus, the price for X3 should be increased by at
least two rupee per unit to ensure no reduction of profits.

(v) Original Constraint Inequality with the coefficient of variables:

Let us consider the given iteration is the 2nd one. The first iteration (I1) must have had S2 in-
stead of X1. Row X1 of I2 has been computed by dividing the S2 row of I1 by 3. S2 of I1 (in Identity
Matrix) would have been 1. Now it is 1/3. Working backwards, we multiply row X1 of I2 by 3 to
get Row S2 of I1.

Original Row S2 [X1 of I2 3]:

(1X1 + 2/3X2 + 2X3) 3 400 x 3

Or
3X1 + 2X2 + 6X3 1,200

Similarly Original Row S1 [ S1 of I2 + X1 of I2 ]:

( 0X1 + 4/3X2 + 0X3 ) + ( 1X1 + 2/3X2 + 2X3 ) 400 + 400

Or

X1 + 2X2 + 2X3 800

Similarly Original Row S3 [S3 of I2 + 2 X1 of I2]:

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0X1 + 5/3X2 + 0X3 + (1X1 + 2/3X2 + 2X3) 2 400 + 400 2

Or
2X1 + 3X2 + 4X3 1,200

Problem-3

Given below is an iteration in a simplex table for a maximization objective linear program-
ming product mix problem for products x, y and z. Each of these products is processed
in three machines KA-07, KB-27 & KC-49 and each machine has limited available hours.

C j 30 40 20 0 0 0
CB Basic Value of Basic x y z s1 s2 s3

Variable (B) Variables b (=XB)


30 x 250 1 0 10/16 -12/16 0
40 y 625 0 1 31/16 -7/16 10/16 0
0 s3 125 0 0 11/16 -3/16 1/8 1
s1, s2 and s3 are slack variables for machine KA-07, KB-27 and KC-49 respectively.

Answer the following questions, giving reasons in brief:

(i) Does the table above give an Optimal Solution?


(ii) Are there more than one Optimal Solution / Alternate Optimal Solution?
(iii) Is this solution Feasible?
(iv) Is this solution Degenerate?
(v) Write down the Objective Function of the problem.
(vi) Write the Optimal Product Mix and Profit shown by the above solution.
(vii) Which of these machines is being used to the full capacity when producing according to
this solution?
(viii) How much would you be prepared to pay for another hour of capacity each on machine
KA-07, machine KB-27, and machine KC-49?
(ix) If the company wishes to expand the production capacity, which of the three resources
should be given priority?
(x) What happens if 16 machine hours are lost due to some mechanical problem in machine
KB-27?
(xi) A customer would like to have one unit of product z and is willing to pay higher price for
z in order to get it. How much should the price be increased so that the companys
profit remains unchanged?
(xii) Anew product is proposed to be introduced which would require processing time of
4 hours on machine KA-07, 2 hours on machine KB-27 and 4 hours on machine KC-49.
It would yield a profit of `12 per unit. Do you think it is advisable to introduce this

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product?

Solution

(i) Yes, the given solution is optimal because all C j - Zj are less than, or equal to, zero.

C j 30 40 20 0 0 0
CB Basic Value of Basic x y z s1 s2 s3
Variable (B) Variables b (=XB)
30 x 250 1 0 -26/16 10/16 -12/16 0
40 y 625 0 1 31/16 -7/16 10/16 0
0 s3 125 0 0 11/16 -3/16 1/8 1
Zj = C Bi Xj 30 40 115/4 5/4 5/2 0
Cj Zj 0 0 -35/4 -5/4 -5/2 0

(ii) No, because for each of the non - basic variables z, s1 and s2, the Cj - Zj is strictly negative. Alternate
optimal solution (s) exist when either of non-basic variables has a zero Cj - Zj.

Non Basic Variables z s1 s2


Cj Z j -35/4 -5/4 -5/2

(iii) Yes, because the given solution has no artificial variable in the basis.

(iv) No, solution is not degenerate as none of the basic variables has zero quantity.
Basic Variables x y s3
Quantity 250 625 125

(A solution degenerates if the Quantity of one or more basic variables is zero)

(v) Maximize Z = 30x + 40y + 20z

(vi) According to the given solution, 250 units of x and 625 units of y are being produced.
The total profit is `32,500 (250 units `30 + 625 units `40).

(vii) Machine KA-07 and KB-27 are being used to the full capacity because, the slack
variable s1 and s2 corresponding to them has a zero value in the solution.

(viii) The shadow price of hours on machine KA-07, machine KB-27 and machine KC-49
are being `5/4, `5/2 and `0, respectively, these are the maximum prices one would
be prepared to pay for another hour of capacity for these three machines.

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(ix) Machine KB-27 may be given priority as its shadow price is the highest.
(x) When 16 hours are lost, then production of x would increase by 12 units and that of y
would decrease by 10 units and the total profit decrease by `40.
(xi) Cj Zj for z being -35/4, production of each unit of z would cause a reduction of
35/4 rupee. Thus, the price for z should be increased by at least 35/4 rupee to ensure
no reduction of profits.

(xii) Shadow prices of times on machines KA-07, KB-27 and KC-49 are `5/4, `5/2 and `0.
Production of a unit of the proposed new product would, therefore, reduce profit by `10
[(4 hrs. `5/4) + (2 hrs. `5/2) + (4 hrs. `0)].
Since the product would yield a profit of `12, it would result in a net increase in profit
at a rate of `2 per unit. It is advisable, therefore to introduce it.

Transportation Basic Concepts

(Problem-1)

In a 3 x 4 transportation problem for minimizing costs, will the R2C1 cell (at the intersection of

the 2nd row and 1st column) always figure in the initial solution by the North West Corner Rule? Why?

Solution

The Initial solution obtained by the North-West Corner Rule in transportation need not
always contain the R2C1 cell. In the North-West Corner Rule the first allocation is made
at R1C1 cell and then it only moves towards R2C1 cell when the resources at the first
row i.e. R1 is exhausted first than the resources of first column i.e. C1. On the contrary if
resources at first column i.e. C1 is exhausted first then the next allocation will be at R1C2.
For example the resource availability at first row (R1) is 1,500 units and the demand in first
column (C1) is 1,000 units. In this case resource availability of first row (R1) will be exhausted
to the extent of the demand in first column (C1) first and then the remaining resource avail-
ability at first row (R 1) will be used to meet the demand of the second column (C2). In this
example cell R2C1 will not come in initial solution obtained by the North-West Corner Rule.

Problem-2

In a transportation problem for cost minimization, there are 4 rows indicating quantities de-
manded and this totals up to 1,200 units. There are 4 columns giving quantities supplied.
This totals up to 1,400 units. What is the condition for a solution to be degenerate?

Solution
The condition for degeneracy is that the number of allocations in a solution is less than m+n-
1. The given problem is an unbalanced situation and hence a dummy row is to be added,
since the column quantity is greater than that of the row quantity. The total number of

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rows and columns will be 9 i.e. (5 rows and 4 columns). Therefore, m+n-1 (= 8), i.e. if the
number of allocations is less than 8, then degeneracy would occur.

Assignment Problem Basic Concepts

Problem-1

Explain following statement


Assignment problem is special case of transportation problem; it can also be solved by
transportation methods.

Solution

The assignment problem is special case of transportation problem; it can also be solved
by transportation method. But the solution obtained by applying this method would be
severely degenerate.This is because the optimality test in the transportation method requires
that there must be m+n-1 allocations/assignments. But due to the special structure of
assignment problem of order n n, any solution cannot have more than n assignments.
Thus, the assignment problem is naturally degenerate. In order to remove degeneracy, n-1*
number of dummy allocations will be required in order to proceed with the transportation
method. Thus, the problem of degeneracy at each solution makes the transportation method
computationally inefficient for solving an assignment problem.

Problem-2

In an assignment problem to assign jobs to men to minimize the time taken, suppose that
one man does not know how to do a particular job, how will you eliminate this allocation from
the solution?

Solution
In an assignment minimization problem, if one task cannot be assigned to one person, introduce
a prohibitively large cost for that allocation, say M, where M has a high the value. Then, while
doing the row minimum and column minimum operations, automatically this allocation
will get eliminated.

Problem-3

Answer the following independent situations relating to an assignment problem with a minimiza-
tion objective:
(i) Just after row and column minimum operations, we find that a particular row has 2
zeroes. Does this imply that the 2 corresponding numbers in the original matrix before
any operation were equal? Why?

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(ii) Under the usual notation, where a32 means the element at the intersection of the 3rd row and 2nd
column, we have, in a 4 4 assignment. What can you conclude about the remaining assignments? Why?

Solution

(i) Under the Hungarian Assignment Method, the prerequisite to assign any job is that each
row and column must have a zero value in its corresponding cells. If any row or column
does not have any zero value then to obtain zero value, each cell values in the row or
column is subtracted by the corresponding minimum cell value of respective rows
or columns by performing row or column operation. This means if any row or column
have two or more cells having same minimum value then these row or column will have
more than one zero. However, having two zeros does not necessarily imply two equal
values in the original assignment matrix just before row and column operations. Two
zeroes in a same row can also be possible by two different operations i.e. one zero
from row operation and one zero from column operation.

(ii) The order of matrix in the assignment problem is 4 4. The total assignment (allocations)
will be four. In the assignment problem when any allocation is made in any cell then
the corresponding row and column become unavailable for further allocation. Hence,
these corresponding row and column are crossed mark to show unavailability. In the given
assignment matrix two allocations have been made in a24 (2nd row and 4th column) and
a32 (3rd row and 2nd column). This implies that 2nd and 3rd row and 4th and 2nd
column are unavailable for further allocation.
Therefore, the other allocations are at either at a11 and a43 or at a13 and a41.

PERT/ CPM Basic Concepts

Problem-1

State the validity of following statements along with the reasons:

(i) Two activities have common predecessor and successor activities. So, they can have
common initial and final nodes.
(ii) In respect of any activity whether real or dummy, the terminal node should bear a number
higher than the initial node number.
(iii) The difference between the latest event time and the earliest event time is termed as
free float.
(iv) For every critical activity in a network, the earliest start and the earliest finish time as
well as the latest finish time and the latest start time are the same.
(v) The optimal duration of a project is the minimum time in which it can be completed.
(vi) Resource leveling aims at smoothening of the resource usage rate without changing
the project duration.

Solution

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Ammendment Mat With Solution


(i) Invalid
Reason: As per the rules of network construction, parallel activities between two
events, without intervening events, are prohibited. Dummy activities are needed when
two or more activities have same initial and terminal events. Dummy activities do not
consume time or resources.
(ii) Valid
Reason: As per the conventions adopted in drawing networks, the head event or
terminal node always has a number higher than that of initial node or tail event.
(iii) Invalid
Reason: The difference between the latest event time and the earliest event time is
termed as slack of an event. Free float is determined by subtracting head event slack
from the total float of an activity.
Invalid
Reason: For every critical activity in a network, the earliest start time and the latest
start time is same and also the earliest finish time and the latest finish time is same.
(v) Invalid
Reason: The optimum duration is the time period in which the total cost of the project is
minimum.
(vi) Valid
Reason: Resource leveling is a network technique used for reducing the requirement of
a particular resource due to its paucity or insufficiency within a constraint on the project
duration. The process of resource leveling utilize the large floats available on non-
critical activities of the project and cuts down the demand of the resource.

Application of Learning Curve

Problem-1

State whether the learning curve theory can be applied to .the following independent situa-
tions briefly justifying your decision:
(i) A labour intensive sculpted product is carved from the metal provided to the staff. The
metal is sourced from different suppliers since it is scarce. The alloy composition of the
input metal is quite different among the suppliers.
(ii) Pieces of hand-made furniture are assembled by the company in a far off location. The
labourers do not know anything about the final product which utilizes their work. As a
matter of further precaution, rotation of labour is done frequently.
(ill) Skilled workers have been employed for a long time. The company has adequate
market for the craft pieces done by these experts.
(iv) A company funds that it always has an adverse usage of indirect material. It wants to
apply learning curve theory to improve the way standards have been set.

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Ammendment Mat With Solution


Solution

(i) Learning Curve Theory will not be applicable as alloy combination of the input metal
is quite different among the suppliers hence learning experience with one type of
metal may not be beneficial for the workers to deal with other metal with separate alloy
composition.
(ii) Learning Curve Theory will not be applicable as in this situation rotation of labour is
done frequently, labours will not be able to get the benefit of learning and apply their
learning. Hence, learning curve theory can not be applied.
(iii) Learning Curve Theory will not be applicable as in this situation as workers are
skilled and employed for a long time, they have already achieved maximum level of
expertise by taking advantage of learning. Hence, at this point of time learning curve
theory can not be applied.
(iv) Learning Curve Theory will not be applicable as indirect materials are the materials
which are not used directly in the production (not directly proportionate with volume
of output) and usually used machines (e.g. lubricants, spares parts etc.) with less human
interactions. Adverse usage of indirect materials can be controlled through proper
monitoring and appropriate standard settings and not from applying learning curve
theory.

Problem-2

The following information is provided by a firm. The factory manager wants to use appropriate
average learning rate on activities, so that he may forecast costs and prices for certain levels
of activity.

(i) A set of very experienced people feed data into the computer for processing inventory
records in the factory. The manager wishes to apply 80% learning rate on data entry
and calculation of inventory.
(ii) A new type of machinery is to be installed in the factory. This is patented process and
the output may take a year for full fledged production. The factory manager wants to
use a learning rate on the workers at the new machine.
(iii) An operation uses contract labour. The contractor shifts people among various jobs
once in two days. The labour force performs one task in 3 days. The manager wants to
apply an average learning rate for these workers.

Required

Advise to the manager with reasons on the applicability of the learning curve theory on
the above information.

Solution
The learning curve does not apply to very experienced people for the same job, since time
taken can never tend to become zero or reduce very considerably after a certain range

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of output. This is the limitation of the learning curve.

(i) Data entry is a manual job so learning rate theory may be applied. Calculation of
inventory is a computerized job. Learning rate applies only to manual labour.
(ii) Learning rate should not be applied to a new process which the firm has never tried
before.
(iii) The workers are shifted even before completion of one unit of work. Hence learning
rate will not apply.

Problem-3

State whether and why the following are valid or not for learning curve theory:

(i) Learning curve theory applies to a division of a company which is fully automated.
(ii) Learning curve theory helps in setting standards.
(iii) Learning curve helps in pricing decisions.
(iv) Experienced workmen are more prone to learning effect.

Solution
Valid or Invalid

Sl. No. Situation Valid or Not Reason


Valid
(i) Learning curve theory applies to a Not Valid It can be very effective in la-
division of a company which is fully bour oriented industry but
automated not in fully automated com-
pany.
(ii) Learning curve theory helps in set- Valid If budgets and standards are
ting standards set without considering the
learning effect, meaning less
variances are likely to occur.
The learning curve is quite
helpful in setting standards
in learning phase.
(iii) Learning curve helps in pricing deci- Valid The use of cost data adjust-
sions ed for learning effect helps
in development of advanta-
geous pricing policy.
(iv) Experienced workmen are more Not Valid Activities being performed
prone to learning effect by experienced workmen,
who are thoroughly familiar
with those activities, will not
be subject to learning effect.

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Comparative Study of LP Methods
Comparative Study of LP Methods
Situations Graphical Simplex Assignment Transportation
1. Condition Strictly 2 variables 2 variables One to one one row to be Total availability must match
asigned to one column with total requirement

2. Objective Maximisation / Minimization Maximisation / Minimization Minimization Minimization

3. Steps Class Notes Class Notes Class Notes Class Notes

4. Optimality Test The point of the boundary of NER (or ) should be 0 or No. of lines drawn = Order of should be 0 or +ve
common region is put in the negative for maximum obj or Matrix
Objective function to check the NER should be 0 or positive
maximum / minimum value of minimum Obj
Z.

5. If optimality test Try another boundary point of Iteration by making that Adjustment with uncovered Reallocation by way of loop
not satisfied the common region column as KC, where condition element starting form the cell where is
is not satisfied and the variable most negative
of KC would enter into the
solution

6. No Feasible (Not feasible) When there is an artificial slack Not feasible if no. of line > Not feasible if total availability
Solution variable in optimal solution or order of matrix or Boxing not is not matching with the total
Quantity of basic variables are being done in each row or requirement
all negative column

When no common region exist


for set of Constraints

7. Opportunity Cost NER Value Value



on shadow price
8. Multiple or When same results come at When NER of non basic When Arbitrary boxing is to be When of an unallocated
alternate solution more than one boundary point variable is 0. To get that done, i.e. no single 0 is available cell is 0. To get the alternate
of the common region alternate solution select that in a row / column solution allocate quantity to
column as KC and reiterate that cell by way of a loop
9. Unbounded When there is no boundary of When replacement ratios for
solution common region. Minimization all the rows become negative.
objective can be solved using This would make the quantity
artificial boundary. Maximiza- of incoming variable in the
tion objective cannot be solved iteration also negative. Such
if unbounded problem cannot be solved
irrespective of the objective.

10. Degeneracy When any of main / basic vari- M + n 1 > No. of allocations
(solution cannot able has quantity = 0 (This would not complete the
(0,y1)
be proceeded Indication of quantity of (u + v) Matrix.
further) basic variable will be 0 can be Introduce e (e 0) to the least
(x2,0) obtained from Replacement cost unallocated independent

(x1,0) ratio of previous iteration, cell
where there is a tie between 2
When any of main variable is 0
minimum Replacement Ratios
in the optimum solution
(Tie to be broken by selecting
any RR).

11. Formulation Objective function & con- Objective and constraints along Matrix showing cost / time in Matrix showing cost / time and
straints with slack / Surplus / Artificial row and columns requirement and availability of
slack variable and their co- each column and row respec-
efficients tively.

12. Prohibited Introduce M (M ) in the Introduce M (M ) in the



Solution prohibited cell prohibited cell

13. Conditional Remove that row and column Allocate by way of loop to the

Allocation and apply steps on remaining conditional cell.

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Ammendment Mat With Solution

Relevant Costing
Relevant Cost Irrelevant Cost

Future cost influencing a decision. Varies from situation to situation & cant Cost which are not influenced by any decision and thus have no impact on any decision.
last longer, applicable only for short term. In opportunity approach opportunity cost is E.g.: Sunk / Historical Cost, Committed FC.
considered as relevant cost. E.g.: Variable cost, Avoidable FC, Opp. Cost.

Approaches for decision making:


1) Total Cost Approach (Considers Relevant as well as Irrelevant Costs)
2) Differential/ Incremental Cost Approach (Considers only Relevant Costs, Irrelevant Costs are eliminated by default)
3) Opportunity Cost Approach (Considers Relevant Costs only along with Opportunity Costs)

Relevant Cost under Opportunity Approach:


Cost to be Incurred ***
Add: Benefit Lost/Opp. Cost ***
Less: Benefit Achieved/Opp. Gain (***)
Net Relevant /Incremental Cost ***

Material Labour Overhead Depreciation


Variable over head
Fully relevant
In Stock To be purchased Direct Labour Indirect Labour Fixed Over head In possession To be Purchased
Non Moving Not Busy No Use
Rel.cost=Benefit Lost Rel.cost=cost Rel.cost= diff in
Regular to be incurred Avoidable Unavoidable scrap value
Rel.cost=Current PP Busy in Regular work =fully relevant =always irrelevant Regular use
Toxic Rel.cost= cost to be Rel.cost=diff in
Rel.cost=Saving in incurred+Benft Lost Purchase value
removal cost
Treat As Indirect Worker if not retrenched
Regular use after offer No use after offer
Rel. cost = Cost to be Not Busy Busy in Regular work Additional Time/over Rel.cost= Pur.Value at start - Rel.cost=diff in
incurred for units time Pur. Value at end Purchase value
required Rel.cost = NIL cost to be Rel.cost= Extra cost
incurred NIL to be incurred
+ opp. Cost **
Rel Cost **

Courtesy: Shubham Chakraborty

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Ammendment Mat With Solution

START

INTRODUCE NECESSARY SLACK, SURPLUS AND AFRTIFICIAL


SLACK VARIABLES TO CONVERT INEQNS INTO EQNS AND
NEUTRALISE THEM IN OBJECTIVE FUNCTION

WRITE THE INITIAL SIMPLEX TABLE AND


CALCULATE THE NER (Cj - Zj)

IS THE PROBLEM
MAXIMISATION OR
MINIMISATION?

MINIMISATION
MAXIMISATION
SELECT THE MOST
NEGATIVE NER AND SELECT THE LARGEST
DESIGNATE THE NER AND DESIGNATE
COLUMN AS KC THE COLUMN AS KC

DIVIDE THE CORRESPONDING QTY BY COEFFICIENT


IN THE KC IN R.R. COLUMN IN RHS. SELECT THE
ROW WITH SMALLEST NON NEGATIVE VALUE AND
CALL IT AS KR

DESIGNATE THE INTERSECTION


OF KC AND KR AS KEY ELEMENT

CALCULATE F.R. BY DIVIDING OTHER KC


ELEMENTS BY KEY ELEMENT

(1) DIVIDE ALL ELEMENTS OF THE KR BY KEY ELEMENT


(2) OBTAIN OTHER ROWS AS FOLLOWS: OLD ROW - (KR ELEMENTS X FR)

OBTAIN NER(Cj - Zj)

IS THE PROBLEM
MAXIMISATION OR
MINIMISATION?

THE SOLUTION IS OPTIMAL FOR MAXIMISATION IF


NER IS 0 OR +VE AND FOR MINIMISATION IF NER IS 0
OR -VE

STOP

Simplex Algorithm Flow Chart

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Ammendment Mat With Solution


Satish Jalan Classes Courtesy: Shubham Chakraborty
Standard Costing (bird's eye view)

Cost Variances (Production Analysis) Revenue Variances (Periodic Analysis) Reconciliation


-convert standard for actual production -convert standard for actual period
Material Quality Cost Var. Material Variances Labour Variances Variable O/H Variances Fixed O/H Variances Total O/H Variances Sales Variances Profit variances Absorption Approach Marginal Approach
1 Material Cost Variance: Material Cost Variance: Labour Cost Variance: VOH Cost Variance: FOH Cost Variance: Total O/H Cost Variances: Sales Value Variance: Sales Profit Variance: Budgeted Profit ** Budgeted Profit **
(Total Std Input Cost for (Total Std Cost for Act. (Total Std Cost for Act. (Total Std Cost for Act. (Std. FOH for Act. Output - FOH Cost Variance + VOH (Act. Sales for Act. Period - (Act. Profit for Act. Period - + Profit Price Var. ** + Contbn. Price Var. **
Act. Output - Act Input Output - Total act Cost) Output - Total act Cost) Output - Total act Cost for Act. FOH) Cost Variance Bud. Sales for Act. Period) Bud. Profit for Act. Period) + Profit Volume Var. ** + Contbn. Volume Var. **
Cost) Prdctv hrs) + Cost Var. + Cost Var.
2 Material Price Variance: Material Price Variance: labour Rate Variance: VOH Rate/Exp. Variance: FOH Exp. Variance: Total O/H Exp. Variance: Sales Price Variance: Profit Price Variance: MCV ** MCV **
(Std Pr. -Act Pr.) x Act Qt. (Std Pr. -Act Pr.) x Act Qt. (Std. Rate - Act. Rate) x Act. (Std. Rate/hr. - Act (Bud. FOH for Bud. Output - VOH Exp. Variance + FOH (Act. Price - Std. Price) x (Act. Profit/ut. - LCV ** LCV **
=Std Pr. x Act Qt.-Act Pr. x =Std Pr. x Act Qt.-Act Pr. x Hrs paid Rate/hr.) x Act. Prdctv hrs Act. FOH) Exp. Varinace. Act. output sold Std.profit/ut.) x Act. output VOHCV ** VOHCV **
Act Qt. Act Qt. = AP x AO - SP x AO sold FOH Exp. Var. ** FOH Exp. Var. ** **
= AP x AO - SP x AO FOH Vol. Var. ** **
3 Material Usage Variance: Material Usage Variance: Labour Efficiency VOH Efficiency Variance: FOH Volume Variance: VOH Efficiency Variance: Sales Volume Variance: Profit Volume Variance: Actual Profit Actual Profit
(Std Qt.-Act Qt.) x Std Pr. (Std Qt. for Act. Output-Act Variance: (Std. Hrs for Act. Output - (Act. Output - Bud. Output) (Std. Hrs for Act. Output - (Act. Output sold - Bud (Act. Output sold - Bud on Act Cost ** on Act Cost **
=Std Qt. x Std Pr. - Act Qt. x Qt.) x Std Pr. (Std. Hrs for Act. Out put - Act. Prdctv hrs) x Std. x Std. FOH/ut. Act. Prdctv hrs) x Std. output sold) x Std Selling output sold) x Std Profit/ut.
Std. Pr. =Std Qt. x Std Pr. - Act Qt. x Act. Prodctv Hrs) x Std Rate/hr. Rate/hr. price/ut. =AO x Std. Profit/ut - BO x A) Profit Price Var. = Sales
Std. Pr. Rate/hr =AO x Std. SP - BO x Std. SP Std. Profit/ut Price Var. A) Contbn. Price Var. =
Sales Price Var.
4 Material Mix Variance: Material Mix Variance: Labour Mix Variance: FOH Calendar Variance: FOH Volume Variance: Sales Mix Variance: Profit Mix Variance:
(Std. Prop. - Act. Prop.) x (Std. Prop. - Act. Prop.) x (TAPH/TSH) x TSC -(APH x (Act. Working dy - Bud. (Act. Output - Bud. Output) (Act. Prop - Std. Prop) x (Act. Prop - Std. Prop) x B) Contbn. Volume Var. =
Total std. Qt. x StdPr. Total std. Qt. x StdPr. SR) Working dy) x Std. FOH/day x Std. FOH/ut. TAO x Std. SP/ut TAO x Std. Profit/ut Profit Volume Var. + FOH
=(TAQ/TSQ) x TSC-(AQ x =(TAQ/TSQ) x TSC-(AQ x SP) =AO x Std SP - (TAO/TSO) x =AO x Std. Profit/ut - Volume Var.
SP) Total Bud. Sales (TAO/TBO) x Total Bud.
Profit
5 Material Yield Variance: Material Yield Variance: Labour Yield Variance: FOH Capacity Sales Qty. Yield Variance: Profit Qty. Variance: Note: Note:
(Total Std Qt. for Act. (Total Std Qt. for Act. (Total Std Hr. -Total Act. Var.(Revised): (Total Act. Output - Total (Total Act. Output - Total Add: Fav. Variances Add: Fav. Variances
Output - Total Act. Qt.) x Output - Total Act. Qt.) x Prdctv Hrs) x Std. Wtd. Avg. (Act. Hrs - Bud. Hrs in act Bud. Output) x Std. Wtd. Bud. Output) x Std. Wtd. Less: Adv. Variances Less: Adv. Variances
Std. Wtd. Avg. Pr. Std. Wtd. Avg. Pr. Rate dys) x Std FOH/hr Avg Price/ut. Avg Profit/ut.

6 Mat. Rework Cost Var.: Labour Idle Time Var.: FOH Idle Time Variance: Market Size Variance: Market Size Variance:
(Std Rewrk cost for Act (Std. Abnrml Idle tm - Act. (Std. Idle Tm - Act. Idle Tm) (Act. Industry Sales ut - (Act. Industry Sales ut -
Output - Act. Rewrk cost) Abnrml Idle tm) x Std x Std FOH/hr Bud. Industry sales ut) x Bud. Industry sales ut) x
Rate/hr Bud share% x Std. Wtd. Avg Bud sales% x Std. Wtd. Avg
Price/ut. Profit/ut.
(For Ab. Idle Time)
7 Mat. Scrap realisation FOH Efficiency Variance: Market Share Variance: Market Share Variance:
Variance: (Std. Hrs for Act. Output - (Act. Share% - Bud. Share%) (Act. Share% - Bud. Share%)
(Act. Scrap Rlsn-Std Scrp Act. Prdctv hrs) x Std. x Act. Industry Sales x Std. x Act. Industry Sales x Std.
Rlsn for Act. Out put) Rate/hr. Wtd. Avg Price/ut. Wtd. Avg Profit/ut.

8 Material Quality Cost Var.


(Std net Mat. Cost for Act.
Output - Act net Mat. Cost)

9 Check: 1= 2+3; 3= 4+5; Check: 1= 2+3 ; 3= 4+5 Check: 1= 2+3 ; 3= 4+5+6 Check: 1= 2+3 Check: 1= 2+3 ; Check: 1=2+3+4 Check: 1= 2+3 ;3= 4+5; Check: 1= 2+3 ;3= 4+5;
8=1+6+7 3= 4+5+6+7 5= 6+7 5= 6+7

A) Emergency Purchase A) Std. Hrs produced is out A) Can vary with output A) Marginal Approach: No A) 3 points analysis. A) Cost is constant A) Product Cost = Variable A) Product Cost = Variable
Effect. put measure for multiple produced, then no VOH Eff. FOH Vol Var. at Std. Cost Cost + Fixed Cost Cost
Additional Price over act. products. Var.
Purchase Price should be B) FOH Ratios: B) Profit Price Variance Period Cost = Selling Cost. Period Cost = Fixed Cost.
charged to Production B) Where no. of employees 1. Vol. Ratio= AO/BO = Sales Price Variance.
Manager. given take Man-Hrs. 2. Cal. Ratio= Act days/Bud B) Margin = Profit = SP-VC- B) Margin =Cont. = SP-VC
B) Single Plan: Closing st. at Days. FC
std price. & MPV on C) Std. Ab. Idle Time is 3. Capa. Ratio= AH/BH in
Purchase Qty. always "0" ; ITV is adverse. act days.
Partial Plan: Closing st. at 4. Eff. Ratio= SH for AO/AH
actual price. & MPV on Qty.
consumed. (1 = 2 x 3 x 4)

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Transportation - Flow Chart

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99